Algorithmic Trading Rapidly Replacing Need For Humans

DMandPenfold writes "Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets. Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday. Nevertheless, this proportion is significantly lower than in the U.S., where three-quarters of equity dealing is computer generated. The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading. There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

Comments

Not replacing, just adding on top

[North Korea]

It's not replacing humans, it just improves profit making for those who want to trade. It's only one part of stock exchanges. That's fine too - if you can come up with an advanced algorithm that nets you profit, sure use it. Everyone on slashdot would.

Re:Not replacing, just adding on top

[Hatta]

It's not replacing humans, it just improves profit making for those who want to trade

By siphoning value away from those who want to do something productive.

Re:Not replacing, just adding on top

[thePuck77]

It's not replacing humans, it just improves profit making for those who want to trade. It's only one part of stock exchanges. That's fine too - if you can come up with an advanced algorithm that nets you profit, sure use it. Everyone on slashdot would.

It's not replacing humans yet. And that's fine. When it does, investors will simply move to a higher level of abstraction and a new level of economic engagement will come into being. Larger, more subtle patterns will become apparent and we will simply have a new game to play.

Re:Not replacing, just adding on top

[h4rr4r]

What is this something productive that the stock market does?
Other than issuing new stock, when is it productive for the companies invested in?

Seems not much different than trading cards, now that most companies don't give dividends.

Re:Not replacing, just adding on top

[Anrego]

Agreed.

The way it was supposed to work.. where people would invest in ideas they thought were good in the hopes that they would take off and make a profit... made sense.

It's so abstract from that and there is so much skimming off the top (don't give me "market liquidity" crap...) now that we ideally should just wipe it and start fresh from the basics, with regulations in place to prevent the kind of bullshit that is happening at present.

Problem is the people who could make this kind of thing happen are bringing in so much money from the way things currently are, that they have little motivation to do so.

Re:Not replacing, just adding on top

[MightyMartian]

In other words, the system will become so complex that we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses, kills trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Re:Not replacing, just adding on top

[Anrego]

The original idea made sense!

Here is how it was supposed to go:

  I have a really great idea and here is how I think it will become profitable... I need a metric ass-tonne of money to get going though!
  this looks like a solid idea, here is some money to get going in exchange for a small chunk of your company... if it takes off.. this chunk will be worth more than I am giving you now

But I agree, it has become so abstract from this with so much bullshit that just skims off the top that we should just start over, with regulations like "you are limited to 50 trades over the course of your lifetime".

Re:Not replacing, just adding on top

[Anonymous Coward]

"What is this something productive that the stock market does?"

It allows people such as you and I to have part ownership in publicly traded companies. Said companies receive money for development and operation of whatever it is they do, and in exchange, I stand to profit (or lose) depending on how they do.

You're welcome to not participate, but every major economy uses a variant of this system, because it's all but impossible to NOT have such a system and retain a modern economy.

There is no guarantee you will not lose money, especially in the short term. But in the long term - about 4 decades for me now - I am far, far better off having invested money in the stock market. You're certainly free not to, though.

Re:Not replacing, just adding on top

[jamiesan]

This will be why Skynet never runs out of money to build new stuff!

Re:Not replacing, just adding on top

[hweimer]

What is this something productive that the stock market does?

It allows people like you and me to participate in economic growth.

Re:Not replacing, just adding on top

[Tsingi]

In other words, the system will become so complex that we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses, kills trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Umm, I think we've already been there.

Re:Not replacing, just adding on top

[LordNacho]

Dude, that doesn't explain the original idea.

You do realize that when you buy a share at the NYSE, none of that money goes to the company, right? That's because what we call the stock market is the secondary market. Now, why do we need a secondary market? Because it makes primary investors, who DO give money to the company a little less uneasy about risking their money. If there's someone else they can dump it on, they'll be more willing to put up the money.

Re:Not replacing, just adding on top

[h4rr4r]

That was the idea once upon a time. These days I disagree.

Otherwise stock would have voting rights that mattered and pay dividends.

Re:Not replacing, just adding on top

[TheRaven64]

don't give me "market liquidity" crap.

It's not all crap. There is value in liquidity. A company that wants to expand needs to be able to finance this expansion. This typically involves either issuing more shares or getting a loan. The former is preferable to the company (no interest to pay), but needs investors. Having some speculators in the market makes it possible for the company to issue the stock and sell it immediately to speculators, who later sell it on to long-term investors once they've had more time to judge the risks.

The problem is that we now have a lot more speculators and they dominate the system, so the ability of a company to raise capital no longer depends on whether it's a good long-term investment, but on the opinions of the speculators.

Re:Not replacing, just adding on top

[LordNacho]

Even without a single computer based trade, the system as so complex that "we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses..."

Computers are a new angle, but let's not pretend the market ever made sense before that.

Re:Not replacing, just adding on top

[thePuck77]

That happened a long time ago. This at least concedes that human minds are incapable of (or unwilling to) deal with that level of complexity, so we are going to use machines to deal with it. It's honest, and it might even work for a while, further avoiding the inevitable consequences of our economic system. That's all we can really hope for. Nothing can save an economy that doesn't really make anything, yet uses more resources than anyone else.

Re:Not replacing, just adding on top

[h4rr4r]

It is a rigged second market. With fees no other secondary market has, it has regulations that prevents market participants from being on even playing ground and on top of it no one is really interested in non-institutional investors.

Re:Not replacing, just adding on top

[0123456]

It allows people like you and me to participate in economic growth.

Translation: it takes your retirement money and hands it to sociopaths, solely because of preferential tax treatment.

Re:Not replacing, just adding on top

[phatphoton]

Agreed! Thank you!

Re:Not replacing, just adding on top

[Fnord666]

It's not replacing humans yet. And that's fine. When it does, investors will simply move to a higher level of abstraction and a new level of economic engagement will come into being. Larger, more subtle patterns will become apparent and we will simply have a new game to play.

In the end though it will be turtles all the way down.

Re:Not replacing, just adding on top

[LordNacho]

First of all, stocks DO have voting rights. The fact that you can't control Coca Cola with your 100 lot is due to other people owning more shares than you. This is no different from your 1 vote for president not mattering at all. Except of course people with more to lose in Coca Cola have more votes, which is entirely appropriate.

Your comment about dividends is telling. Here's the standard explanation that you'll hear in any course about why it doesn't matter: if a company doesn't pay out a dividend, it keeps the cash. Investors can then adjust their valuation accordingly.

Re:Not replacing, just adding on top

[LordNacho]

don't give me "market liquidity" crap.

The problem is that we now have a lot more speculators and they dominate the system, so the ability of a company to raise capital no longer depends on whether it's a good long-term investment, but on the opinions of the speculators.

And what do you think the speculators use to determine prices? That's right, they make a judgement as to the long-term prospects of the company. In fact, they freely give out this information for everyone, for free. If you didn't have a market in a company, (suppose it's a privately owned restaurant) you'd have to do a lot of legwork figuring out what it was worth.

Re:Not replacing, just adding on top

[LordNacho]

Doesn't make anything? There's load of container vessels sailing around the oceans delivering "things".

Re:Not replacing, just adding on top

[Anonymous Coward]

90% (number I'm pulling out of my butt) or so of the HTF is arbitrage. To give you an example look at the 9:30AM EST to 4PM EST high volume trades (BAC, SPY, GLD, MA, APPL, etc) and compare the after-hour and before market of SPY and GLD (Which are NYSE ARCA) to BAC, MA, APPL. What you'll notice is that in the hour immediately after the market closes there will suddenly be a huge volume of limit orders, but no liquidity. When the market starts trading again you'll see the first 30 minutes of trading go in the direction opposite of the limit orders. And this pattern will be seen across nearly every stock in the S&P 500. Right now 80% (see KCJ) of stocks are moving in sync. This means that you get screwed if you invest in an individual stock, because even if that ONE stock performs well, the market is must move in the same direction otherwise you still lose equity value. Which is why people are dumping their money into SPY (S&P 500 ETF) because that IS the market direction.

The SPY ETF has a market cap larger than BAC. What does that yell you?

Re:Not replacing, just adding on top

[Registered Coward v2]

Dude, that doesn't explain the original idea.

You do realize that when you buy a share at the NYSE, none of that money goes to the company, right?

While that is generally true, that is not always the case. First, a company can buy and sell shares it holds; or issue more shares to raise cash.

Re:Not replacing, just adding on top

[Dogtanian]

don't give me "market liquidity" crap.

It's not all crap.There is value in liquidity.

I don't think he was disputing that- I think you misinterpreted what (I assume) he was trying to say.

Namely that he doesn't believe the stock response that such behaviour is always ultimately beneficial because it increases liquidity- or at least that it doesn't increase liquidity sufficiently to offset the skimming and other drawbacks.

Re:Not replacing, just adding on top

[Dunbal]

Explain how value is "siphoned away".

Re:Not replacing, just adding on top

[LordNacho]

Good point. But I'd say companies buying/selling their own shares is still more akin to a primary market operation. Much as when a fund does it.

Re:Not replacing, just adding on top

[Dunbal]

First of all, stocks DO have voting rights.

You need to learn the difference between share classes: common vs preferred, voting vs non-voting, etc.

Re:Not replacing, just adding on top

[LordNacho]

The money necessary to trade in the market is minuscule. What regulations are you talking about? The only people who are on a different level are the market makers, because of their rather central position in the system. And that's both meat-and-bones MMs and the HFT kind. And there's nothing stopping you from becoming one either...

Re:Not replacing, just adding on top

[LordNacho]

Yeah, I thought I'd keep it simple and not mention A and B shares, that type of shenanigans. But better keep it simple. You have stock, you can vote. And hey, is it voluntary or not to buy a stock? If the stock you are interested in doesn't have the voting rights you want, well, you decide whether you want to buy it.

Re:Not replacing, just adding on top

[H3lldr0p]

I think they use a number of financial tools and hold a number of positions on a given stock, none of which look at the long term stability, profitability, or sustainability of the company but instead focus on the day to day noise in order to maximize when to trade which option they currently hold the most money in.

These people look for the gaps. The gaps of knowledge, the gaps of valuation, and the gaps of naivety of those just getting into that sort of trading. They at not looking at the value of the employees, the value of the products, or the value of the actual company.

Just look at the oil markets and how volatile and uncoupled from supply and demand they've become. We're sitting at the lowest demand for gasoline in fifty years but it's still being traded at two to three times what many feel is the actual value of the good. Look at what it has done to demand for the product and for the larger economy. That is what speculation has gotten us.

Re:Not replacing, just adding on top

[tenco]

The fact that you can't control Coca Cola with your 100 lot is due to other people owning more shares than you. This is no different from your 1 vote for president not mattering at all.

Bullshit. Of course this is different. A democratic vote adheres to "1 man, 1 vote".

Re:Not replacing, just adding on top

[h4rr4r]

Learn about different share classes.

Your rather flippant reply about dividends is telling. Here is reality, it does not matter because the value of a company no longer has anything to do with the value of what it produces or does.

Re:Not replacing, just adding on top

[interval1066]

In other words, the system will become so complex..., kill[ing] trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Kind of like what happened in 1819, 1837, 1857, 1873, 1893, 1929, 1973, 1989, 2008...

The take away here is I don't know that adding complexity, as you call it, will cause more crashes than the market's already experienced. Sure, they're painful, but they're inherent in a free market economy, and nothing new. Automating trading isn't going to change anything. I guess you could always outlaw private trading like China did. Oh wait... they kind of do now, don't they?

Re:Not replacing, just adding on top

[somersault]

How can you be naked if you're wearing shorts? No wonder it's illegal!

Re:Not replacing, just adding on top

[nedlohs]

Issueing new stock would be far more difficult without a functioning market for trading existing stock. So that secondary market is important for the issuing of new stock.

And of course the companies are the objects being traded - the beneficiaries are the owners not the companies.

Re:Not replacing, just adding on top

[ipoverscsi]

The purpose of the stock market is to provide price discovery. If you had perfect information at all times you would know the price of a good and the stock market would be pointless. But because perfect information is impossible, the stock market crowd-sources the gathering of information so that the true price can be discovered.

Determining the price of a good is something only a human can do. Price is a value quantified, and determining value requires sifting and filtering of information and the application of significant amounts of gut instinct. Computers cannot set prices since they don't have any concept of value -- they have neither needs not wants.

Computer assisted trading -- trades where people set stops and buy limits -- is okay because the human has done the work to determine the valid price ranges a priori; the computer simply executes the bid on behalf of the user.

High Frequency Trading, however, should be illegal since it does not involve human value judgements at all. It simply allows a computer to front-run actual humans and siphon off people attempting to perform a useful act -- that is, price discovery.

Re:Not replacing, just adding on top

[nedlohs]

And what do you think the speculators use to determine prices? That's right, they make a judgement as to the long-term prospects of the company. In fact, they freely give out this information for everyone, for free. If you didn't have a market in a company, (suppose it's a privately owned restaurant) you'd have to do a lot of legwork figuring out what it was worth.

No they don't. They determine prices by making a judgement on what others will think the stock will be worth in 5 minutes/5 hours/5 days/5 weeks/5 months time.

It is perfectly normal for a speculator to buy something they think is will be worth $5 in the long term for $15 today because they also think that someone else is going to pay $20 for it tomorrow.

And there's nothing wrong with that, but don't pretend that the long term valuation of something is what they are judging.

Re:Not replacing, just adding on top

[scamper_22]

well, it does it better and cheaper than humans doing the same thing.

Most of the financial industry is just that... people looking at some trends and data and taking actions. It's one of the reasons most actively managed funds don't beat the index year over year. They really don't do anything useful.

They have layers and layers of financial people and associates and advisers... to basically do nothing productive. They basically act as proxies to the actual funds.

So we replace them with a some algorithmic systems. Someone still has to program the system and you typically get some very skilled people designing the algorithm.

At its 'most honest and useful level' it might be a simple algorithm to track dividend paying stock based on their average X year dividend payout. Granny might like this kind of system.

Of course it can be more 'trader' based and just look for patterns and buy and sell quickly...

But again... the point is there were humans doing the same thing. The computer just does it better and more efficiently. There is just no reason to employ many people in the financial services industry when they don't do anything that can't be done better via a computer.

These folks wouldn't blink an eye if they could automate a manufacturing worker's job. There's really no reason we should worry about the automation of 'skilled' or 'educated' labor.

And I don't really buy the line that human oversight will somehow act to prevent feedback loops... Computers are surely vulnerable to it. But so are people. So are regulations.

And they've already begun putting in various stop measures in case things go crazy. We could work towards the 'trader based hft' by maybe throwing in random delays or something... but I think the stock exchanges can work towards monitoring.

Re:Not replacing, just adding on top

[WorBlux]

'High Frequency Trading, however, should be illegal since it does not involve human value judgements at all. It simply allows a computer to front-run actual humans and siphon off people attempting to perform a useful act -- that is, price discovery."

The algorithms are just extensions of human judgement. Certain patterns in stock signal that price move is occurring or is about to occur. It is just stop and buy limits, but just very complex ones the depend more on what happened in the past minute than in the past week like a broker might do.

Re:Not replacing, just adding on top

[RobinEggs]

if a company doesn't pay out a dividend, it keeps the cash. Investors can then adjust their valuation accordingly.

Which suggests that investors react rationally to the presence or absence of dividend; I think the truth is that all but the most conservative investors simply ignore dividend today, and it's a problem in more ways than I can count.

For one thing, stock ownership is supposed to translate to company ownership; in reality when you buy a stock without a dividend you have no way of making money unless you abandon the company you supposedly own at some future time. What kind of owner doesn't benefit from profits unless the company is not only growing but the owner also leaves the company in some proportion (i.e. sells shares)? That's completely, irreconcilably moronic if you ask me.

Re:Not replacing, just adding on top

[flaming error]

+1 insightful

Re:Not replacing, just adding on top

[LordNacho]

That depends on which speculator you mean, of course.

Re:Not replacing, just adding on top

[jgotts]

Living in the eighth largest state, Michigan, my vote means a hell of a lot less than someone's vote in West Virginia. That is because the upper house of the US legislature, the Senate, has two representatives per state, regardless of population. One result of this imbalance is that my state subsidizes other states. In other words, the taxpayers here pay more to Washington in taxes than they receive: The roads here in Michigan are so bad in part because West Virginia's Senator Byrd was on the transportation subcommittee and so West Virginia received more money than it should have received for roads at the expense of Michigan drivers.

So it's like voters in West Virginia have voting shares and Michigan voters have nonvoting shares in the stock known as US citizenship.

Re:Not replacing, just adding on top

[LordNacho]

Well, one could argue that the real problem with the having stock market is decimation of financial interest. Why would a shareholder care about how the managers of BigCorp behave if 1) They own a very small share of it 2) Their share in it is a very small proportion of their total wealth?

Re:Not replacing, just adding on top

[h4rr4r]

The money is pretty low, but the fees oh my god the fees.
The regulations are the self imposed ones that make the play field not level. Like being able to roll back HFT trades they claim are mistakes.

Re:Not replacing, just adding on top

[Nrrqshrr]

When men are of equal value. And they should be.
But in a corporate environment, the one who owns the place is better than you, and has more voting rights than you.

Re:Not replacing, just adding on top

[bill_mcgonigle]

It's fine to allow computers to trade automatically, but they should be forced to respond the the market like every other investor does. Granted, they will respond more quickly than a human can, but that response will still take place, at a minimum, nanoseconds after the trade they're responding to.

Right, and there's also price discrimination. I'm not paying the same fees and commissions an HFT algorithm is, so I need to experience much larger moves to make a profit. All players in a market need to access the market by the same rules.

Now, the bigger question is, "why doesn't somebody just open up a better, more fair market?" Go ahead, look into the regulations and see how easy it will be to do a NASDAQ in 2011.

I swear, half of the posts here can end with "regulatory capture".

Re:Not replacing, just adding on top

[Bob the Super Hamste]

Really so if I am limited to only 50 trades in a lifetime then what about my monthly company stock purchase? I can only do it for 4 years and 2 months and then never be able to sell those shares that sucks balls.

Re:Not replacing, just adding on top

[LordNacho]

Fees are high for retail people, of course. It's the same effort, but for less commission. How's that different from wholesaling any other product? You show up asking for repeat large orders of (widget), and you'll be able to negotiate a deal.

Rollbacks are fishy, true, but consider that there's two guys being rolled back. One would have won, one would have lost. Sometimes it's the HFT guy that would have won, sometimes he would have lost. It's more a question of keeping an orderly market than helping certain people. Keep in mind also that not all HFT guys are the same way on every single trade.

Re:Not replacing, just adding on top

[LordNacho]

Wait a minute. If you have some predefined determinant of value, why have a market at all? You can't force people to value things the way you want.

Re:Not replacing, just adding on top

[ultranova]

And what do you think the speculators use to determine prices? That's right, they make a judgement as to the long-term prospects of the company.

And they also try to guess what other speculators will guess yet other speculators will guess yet other speculators and so on will do. As the number of speculators and thus their influence on the stock price grows, you get to the point where stock values live in their own fantasyland where they rise when a company fires people.

Re:Not replacing, just adding on top

[gstoddart]

Explain how value is "siphoned away".

The large trading houses, who have a direct wire into the exchange, do not pay fees on transactions like the rest of us do.

By doing all of these high volume trades, they more or less get to cut in line and gain benefits of being tied directly into the trading system.

This allows them to reap huge benefits by having a computer do something that you and I would not have access to.

This is literally a mechanism where the trading houses can game the system and skim off the top. You and I could not do this, because we would both be paying fees on the transactions, and because we wouldn't have the same level of access as they do.

Value is siphoned away, because they're exploiting their better access to more or less take their profit before anybody in this (supposedly free and fair) market has a chance to.

Personally, I think the practice should be illegal -- they really do gain access to profit taking that is only made possible by their special role in the way the system works.

Re:Not replacing, just adding on top

[belg4mit]

Yes, it does. He explained the original notion of trading houses, not the current system. See "History of Money."

Re:Not replacing, just adding on top

[Toonol]

I think the market would be vastly improved by adding a random delay of 1-10 seconds to every trade.

Re:Not replacing, just adding on top

[lgw]

It's worse than that - we get terrible corporate governance because companies chase exponential growth through acquisition vs dominating the one market they're good in. This is all the result of capital gains being given preferential tax treatment over dividends.

Tax a dividend exactly as a long-term gain and most of these problems will vanish of their own accord.

Re:Not replacing, just adding on top

[lgw]

We're sitting at the lowest demand for gasoline in fifty years but it's still being traded at two to three times what many feel is the actual value of the good.

The aqctual value of any good is precisely what you can buy or sell it for - there is no other possible definiton of actual value. You're talking about the price you wish it sold for. There's little in life less interesting than the prices people wish things sold for. While we're wishing, I'll take a GTR for a dollar.

Re:Not replacing, just adding on top

[lgw]

Why shouldn't stock prices rise when a company fires people? Costs just went down - to a first-order analysis it's the right stock move. Of course, the details always matter, and everything judged is always gamed, but it's not an absurd market reaction.

Re:Not replacing, just adding on top

[lgw]

Market makers reduce the bid-ask gap. I get to buy a stock cheaper than I would without them - but they split the difference. I get to sell a stock for more than wothout them - but they split the difference.

The entire business model is splitting the difference, and thereby making it cheaper for the small trader to trade. This is especially visible recently in options trading, where everything is a thin market: bid-ask gaps are far smaller than 10 years ago, thanks to algorithmic trading.

I'm about to sell my used car to a dealer for 2/3s of what he will sell it for - the bid-ask gap is huge - I could really use some market makers here!

Re:Not replacing, just adding on top

[h4rr4r]

Even easier than that. Tax all income as income. Does not matter if it is dividends, capital gains, salary, hourly or babysitting money.

Re:Not replacing, just adding on top

[J'raxis]

...with regulations in place to prevent the kind of bullshit that is happening at present.

Considering that the stock market has been regulated since the 1930s, that they continually add new regulations, and that there are now an enormous number of regulations in place that still don't seem to be "prevent[ing] the kind of bullshit that is happening," what makes you think any more regulations will solve the problem?

Re:Not replacing, just adding on top

[frank_adrian314159]

I think we've already been there.

Umm, no. This is something that is still yet to come.

However, the OP was wrong about us asking why we let this happened. Instead, we will declare the brokerages too big to fail, bail them out, make up stories about irresponsible individual, non-computerized traders who "gamed the system" and "caused the crash", and then use the resulting deficits from the bail-out and supporting people through the crash as an excuse to cut benefits to actual people.

Oh... uh, wait... maybe we have been there before...

Re:Not replacing, just adding on top

[RobinEggs]

Eh, there's really no need to go that far. I think it's worthwhile to reward investors with some tax incentives; the problem is the immensity of the tax advantage currently experienced, not it's existence.

Re:Not replacing, just adding on top

[AvitarX]

It increases or decreases collateral for loans though.

Re:Not replacing, just adding on top

[lgw]

There's a key difference though: capital gains are offset by capital losses (which many of us have a lot of carrying forward from year to year). Dividends aren't offsettable by losses, which is abig deal these days, and sadly continues the incentive for companies to continuously acquire in search of exponential growth.

Re:Not replacing, just adding on top

[Oxford_Comma_Lover]

Or maybe you can only sell them once, or once every ten years. That would make them much more of a way of incentivizing employee interest in long-term interest of the company.

Re:Not replacing, just adding on top

[Oxford_Comma_Lover]

Why 1-10 seconds? Why not 1 day? I have to wait three days for trades to settle. Why not limit the frequency of trading generally, increasing the incentive to invest for the actual worth of the underlying company rather than the short-term technical perturbations?

Re:Not replacing, just adding on top

[Oxford_Comma_Lover]

What? How does that make sense?

If I own 10 shares of X at 7 and it goes up to 10, how has my equity gone down if, for example, the market has gone down 10% in the meantime?

Or do you mean that you will lose if, for example, there is a high Beta involved and the market as a whole has gone the other way, swallowing the gains? Or a microcosm of that, I suppose, and only for day-to-day trading?

Re:Not replacing, just adding on top

[Hatta]

In the absence of a middle man trader, any value that would have ended up in the traders pocket would end up in the buyers or the sellers pocket instead.

Re:Not replacing, just adding on top

[zzen]

Another way to look at it is that it helps find the price point by analyzing that crow-sourced human price-finding.

I suppose we should also outlaw exit poll election forecasting, since they help us analyze human behavior and thus somehow invalidate the process of voting for our elected officials.

Re:Not replacing, just adding on top

[Dunbal]

But when you place a buy or sell order on the market, through your broker or through your "large trading house", you are agreeing to a transaction at that price. When you say value is being "siphoned away" what you actually are doing is complaining because someone is willing to take you up on your offer and take the risk involved to try to make that little bit more money with what was (once) your stock.

Nothing is stopping you from trying to get a better price. In fact high frequency trading provides so much liquidity that if you wait just a little while you WILL get your price. Of course if you're impatient or panicked, then you shouldn't have been trading in the first place. But imagine this scenario - where you place a bid and have to wait 10 days to buy stock because the volume is so low. How much does that costs you in terms of lost profits/opportunity cost?

Re:Not replacing, just adding on top

[Dunbal]

That's the theory. In practice, without middle-men you would wait a long time for your stock to sell or be bought. In the meantime the market can move far, far away from your price - usually in the wrong direction for you.

Re:Not replacing, just adding on top

[icebraining]

Why not sell directly to the buyer and cut out the middle man?

Re:Not replacing, just adding on top

[Gorobei]

It makes no sense: he's just stringing random words together.

Seems to be something about correlation trades and varying liquidity based on trading hours. She probably moonlights as a FOX or CNN financial pundit.

Re:Not replacing, just adding on top

[hweimer]

You know, not every publicly traded company is run by sociopaths. You are free to invest your retirement money accordingly.

Re:Not replacing, just adding on top

[mattack2]

...and as a special case of what was already mentioned, of course at IPO, the company (as well as others) is selling shares.

Re:Not replacing, just adding on top

[mattack2]

What kind of owner doesn't benefit from profits unless the company is not only growing but the owner also leaves the company in some proportion

Every other kind of owner?

e.g. if you buy a classic car, that goes up in value, you haven't *realized* any of that profit until you "leave" the car (sell it).

You get the "enjoyment" of having/using the car while you have it, but you also get to "use" the shares you own (voting) without profiting until you sell (except dividends as mentioned).

Re:Not replacing, just adding on top

[timeOday]

I'm about to sell my used car to a dealer for 2/3s of what he will sell it for - the bid-ask gap is huge - I could really use some market makers here!

You mean craigslist?

The most amazing inefficiency I see is real estate agents. They take 6% of your house to do very little of value. The MLS alone is so ripe to be overturned by a website, I can't believe it has lasted this long.

Re:Not replacing, just adding on top

[timeOday]

[The stock market] allows people like you and me to participate in economic growth.

Not really. People get a few tens of thousands in their 401k and suddenly start thinking that taxing capital gains at a lower rate than work income is in their best interest. The reality is that a lot of people own a little stock, and a few people own most of it. The percentage of people owning stock (mostly through retirement accounts) and worker productivity have been rising rapidly for decades, while median income steadily falls even as income at the top skyrockets. So how can we say that the stock market allows average people to participate in economic growth?

Re:Not replacing, just adding on top

[julesh]

Why not sell directly to the buyer and cut out the middle man?

Because typically both buyers and sellers want to buy and sell immediately, rather than waiting for somebody to come along who will agree a shared price with them (which might, of course, never happen). The only real difference with a market maker is that they're effectively willing to place an ad and wait until somebody responds to it. Without them, *you* would have to wait, and the trade you requested might never happen because the price of your instrument moves against you. So, yeah, they are providing a useful service. It's a shame the ability to provide that sevice is protected by the markets and you have to pay rather large fees to be able to do it yourself, but that's what happens when a monopoly is in charge of such a large amount of money.

Re:Not replacing, just adding on top

[DrBoumBoum]

My thoughts exactly. I have the gut feeling that most of the problems caused by international finance would suddenly disappear if you had to keep any stock you buy for one month at least. This would kill speculation for good. Also short selling would be prohibited too. I'm a dreamer.

Re:Not replacing, just adding on top

[Teancum]

Every single time I've seen government intervention into a market, even if well intentioned, tends to backfire and cause the opposite reaction in the market than intended with the regulation. You want longer term investment thinking with this idea? You really will have the opposite happening where "contracts" will be traded instead of shares or some other instrument that will happen instead of the actual trading of shares. Perhaps something else will happen if those contracts are prohibited, then you have to keep piling on regulations on top of regulations to the point you simply can't trade at all.

Yeah, that does wonders for a market. The only role that a government ought to have is to make sure that the person selling and buy are being honest in whatever it is that they are doing. In other words, if they claim to be selling X number of shares in corporation ABC, those shares ought to be legitimate and not something made up out of thin air by a 3rd party.

I don't have problems with short selling, but naked shorting does seem problematic based upon the honesty issue I raised earlier. Even that isn't necessarily the end of the world, but disclosure and reporting is the key on that point too rather than simply prohibiting the practice where attempts to regulate the concept only drive the practice underground.

Re:Not replacing, just adding on top

[Teancum]

If a company can invest its profits at a higher rate of return than the market in general, particularly in a high growth industry, it certainly makes sense to keep that money in the company and use it for expanding the company rather than pulling it out for investment elsewhere.

I think the classic example is Microsoft, which kept its profits for a great many years until finally they pretty much saturated their market to the point that the rate of return was no longer working out, and Microsoft was basically investing its cash reserves into the stock markets with other companies purely for keeping that money increasing in value. As a result, it offered dividends so its investors could do the same thing with that money using their own judgements rather than depending on Microsoft employees trying to outguess the market when they really weren't a mutual fund or financial services company.

The problem is when other companies try to duplicate the success of Microsoft only to find themselves on the short end of the stick. Then again, if the end result is that you are bought out by Microsoft (or another major company), the end result for investors is pretty much the same thing: The money eventually does get pulled out of the company and the equity returned to the shareholders, unless mismanagement of the company results in the equity being frittered away.

Re:Not replacing, just adding on top

[swalve]

Not to mention, value is only killed if idiots sell low. There is a difference between value and price. If I own 0.0001% of GE and the stock crashes, I still own 0.0001% of GE. The value is the same, the price is different.

Re:Not replacing, just adding on top

[ultranova]

Why shouldn't stock prices rise when a company fires people? Costs just went down - to a first-order analysis it's the right stock move. Of course, the details always matter, and everything judged is always gamed, but it's not an absurd market reaction.

Yes, costs went down. On the other hand, it always takes time to get new recruits up to speed, so if a company fires people it's a clear sign that it doesn't expect to have use for them any time soon - in other words, it's not going to expand its business, and is in fact likely fighting to keep profits up.

Re:Not replacing, just adding on top

[lgw]

Right - so the company has finally reacted to the problems it was having, and cut costs to keep magins up. In a rapidly growing economy it's different, but it's been 10+ years since we've had one of those.

Re:Not replacing, just adding on top

[flonker]

The thing is, oil prices are incredibly manipulated. You have huge market movers, a coalition of governments forming a near monopoly, people manipulating the supply, and so on. In any other market, high prices (compared to history), and low volume would be a bubble about to pop.

To me, the oil market just doesn't "feel" right, and gas prices don't "feel" right. 6 years ago, there were complaints of price gouging wrt gas stations. Today, every gas station is selling gas for nearly the same price that was considered unethical 6 years ago.

clever humans can introduce "black swans"

[peter303]

And through off the computers.

Re:clever humans can introduce "black swans"

[Nursie]

Only if they work for the right people. Otherwise they'll be arrested and thrown in jail.

Re:clever humans can introduce "black swans"

[Evangelion]

Then the algorithm corrects for that after seeing it once.

You, coming up with a "plan" 10 seconds after reading an article -- you can't outthink people who are employed to come up with ideas for improving how the computer thinks.

Re:clever humans can introduce "black swans"

[RebelWithoutAClue]

Nope. Dedicated amateurs often do better than the professionals. http://www.engadget.com/2011/01/20/when-it-comes-to-forecasting-apples-earnings-amateurs-are-bett/

The professionals also tend to have blind spots ...

Re:clever humans can introduce "black swans"

[xclr8r]

Some of the comments in that link claim that 4 of the 'amateurs are on the finance board'. I don't have the time for vetting the comments though.

Re:clever humans can introduce "black swans"

[p0p0]

Through != throw. I'm not a grammar nazi, but that wasn't even close phonetically.

Re:clever humans can introduce "black swans"

[aliquis]

Wasn't it some Norwegians who found a "bug" or rather feature / how the bot handled the trades and then profited from tricking it to doing bad trades. ... and got jailed? Atleast punished for it.

If the bot wins there's obviously no issues, and if it fucks up in some cases there's even a way to undo the trades (?)

If it trades on bad decisions from humans it's ok but if the humans profits from bad decisions made by the algorithms / creator then it's ... "hackers", data breach and oh all the horror?

SMBC

[Duradin]

http://www.smbc-comics.com/index.php?db=comics&id=2362#comic

It's all just busy work.

Absolutely

[Anonymous Coward]

As someone who worked at Goldman Sachs, I can completely attest to this; a lot of the software was automated, but what the trading group was always asking for was basically an autopilot system; they wanted to sit back and just let the money roll in. One of them, I remember it distinctly, said that he'd love it if he didn't have to watch all the various windows all the time because he "had better things to do".

This was the same group of guys who, one of them told me "if I could kill you, not get caught, and make money because if it...I wouldn't think twice".

Fun times...

Re:Absolutely

[Lexx Greatrex]

As I have always suspected, the financial markets attract sociopaths like flies to carrion

so SkyNet is really a Wall Street computer?

[peter303]

The computer that "takes over the world" wont come from a mad scientist's workshop or the military-industrial complex. Instead it will emerge out of Wall Street. There are few stronger motives for Artificial Intelligence than to make lots of money.

Re:so SkyNet is really a Wall Street computer?

[MightyMartian]

Intelligence, artificial or otherwise, would be welcome on Wall Street right now.

Re:so SkyNet is really a Wall Street computer?

[Evangelion]

Thanks for not understanding how evolution, or the mind for that matter, works.

We have facilities for communication and self-identity largely as a result of being hunters -- being able to "run a model" of our prey in our minds was massively useful. This structure then got applied to the self, and so the ego was born. (This is one of the currently en vogue evolutionary explanations for the rise of consciousness -- obviously not a subject you can create causal experiments to test easily).

What evolutionary pressures are there for creating self-awareness in algorithmic trading applications (given that it would necessarily be less efficient, and likely introduce errors)?

Re:so SkyNet is really a Wall Street computer?

[gatkinso]

Read "Wealth" by Robert Reed.

Re:so SkyNet is really a Wall Street computer?

[ultranova]

We have facilities for communication and self-identity largely as a result of being hunters -- being able to "run a model" of our prey in our minds was massively useful. This structure then got applied to the self, and so the ego was born. (This is one of the currently en vogue evolutionary explanations for the rise of consciousness -- obviously not a subject you can create causal experiments to test easily).

What evolutionary pressures are there for creating self-awareness in algorithmic trading applications (given that it would necessarily be less efficient, and likely introduce errors)?

What are other trading applications (and the odd human) but prey to one? Wouldn't predicting their actions be useful?

Re:so SkyNet is really a Wall Street computer?

[jd]

Ok, here's one option. You write N herustics and M algorithms (not the same things, guys) and you apply the following rules. (To make it easier to read, I'll use "program" to refer to any herustic or algorithm. This is assumed to cover any implementation, including neural nets, genetic algorithms, ELIZA bots, etc.)

• Any fresh program is given an initial budget of a fixed amount.
• A program is "taxed" (to simulate the natural-world overheads of a given form and lifestyle) per day.
• Any time a program goes into the red (ie: it has "died" of starvation), it is killed off from the system.
• Any time a program does better in one area than another, it forks off a copy with one instance in one domain or sub-domain, the other in the other domain or sub-domain.
• If a program exceeds a certain amount of money, it forks off a copy and splits the money available between them.
• Whenever a program is forked in the same domain, it is modified slightly. Forks across domains are left as-is.
• All programs are run hard real-time (ie: they have an absolutely guaranteed number of CPU cycles per unit of wall-clock time).
• One machine (physical or virtual) shall be responsible for some specific domain and all sub-domains within it. Transfers to a different domain equals a transfer to a different machine.
• If a machine cannot add another program and maintain hard real-time guarantees, no program may be transferred in or be started via a fork within that domain.
• The tax rate shall be proportional to the spare capacity on that machine (so a full machine shall have a higher tax than an empty one, reflecting the sort of resource scarcity you'd have in the real world).
• A program generator can use some certain percentage of the tax collected to create fresh starting points, up to but not exceeding the number that it can afford to give the standard starting money to.

This will generate all the conditions that applied in the very early days of hominids, using the tax system to replace all of the ecological, environmental and biological factors that simply don't have a direct translation in electronic terms, and the program generator to simulate the fact that in the natural world the precursor species is also evolving and therefore throwing out new lines all the time.

I predict that, using the description you have, some measure of sentience at least one program will be achieved within 2.5 - 3.5 million years.

Re:so SkyNet is really a Wall Street computer?

[giorgist]

So in fact if we combine this Wall street computer with the way Google algorithms are developing we may have Skynet almost here. If a billion people contribute in decisions that an algorithm makes, is it still human intelligence or emerging intelligence from this "Internet computer" ?

Re:so SkyNet is really a Wall Street computer?

[Lexx Greatrex]

While I agree that greed is a cornerstone of human tragedy (along with ignorance and apathy); there remains a huge leap between artificial intelligence and sentience. Fortunately until we even understand how to simulate sentience; or even imitate it in even the crudest way, the prospect of a Skynet remains distant and improbable. I hope that you now understand that Skynet is not an imminent threat and that you will continue to remain calm and cooperative through this transitional period.

Re:so SkyNet is really a Wall Street computer?

[Alsee]

While I support the case you are making, I can't resist raining on your parade with my own prediction that "the stock market" will cease to exist in a lot less than 2.5 - 3.5 million years. Chuckle.

Either humans will go extinct, or humans we will abandon a "stock market" system, or the "stock market" system will eventually be mutated or replaced to such point that it becomes unrecognizable.

-

Re:so SkyNet is really a Wall Street computer?

[jd]

Heh! Well, here's an evaporator unit for the rain. :P

I doubt humans (in the generic sense) would go extinct, but 2.5 million years is the gap from Homo Habilis to Homo Sapien so Homo Sapien would almost certainly be extinct. Within that time frame, evolution should have taken humanity at least one, if not two, sub-species further along - maybe more. (By then, we aught to be well along the road to colonising other planets. From a total biomass perspective, there's no difference between a mass extinction and terraforming, and we know that mass extinctions on Earth are followed by massive diversification.)

As for the stock market, again it depends a bit on how concerned you are with form. Cooking has barely existed 1.9 million years. In that time, we've moved from log fires to microwave ovens. They serve a lot of the same purposes but do so in very different ways. To the point that you'd never convince an early hominid that they were the same thing at all. So, to us, yes, no matter what they have in 2.5 million years time, it will simply be too strange to relate to what we know today, but that doesn't mean they won't be able to relate it to what we know today.

Re:so SkyNet is really a Wall Street computer?

[Alsee]

As for the stock market, we were considering your 2.5 million year AI experiment. Assuming we don't go extinct, and even making the wild leap to assume the stock market has some related form of descendant for 2.5 million continuous years, it would certainly be unrecognizable by any currently imaginable definition. I hardly think it safe to presume an "unrecognizable by any definition" system would continue to be compatible with the defined experiment.

And regarding humans evolution over the next few million years, I must again disagree with your unreasonably static assumptions for predicting the future :D

I see effectively zero possibility that a Homo-Habilis-to-Homo-Sapien sort of evolution could continue over the next few million years. Technological evolution outpaces biological evolution by many many orders of magnitude. I predict that we will abandon soft-squishy-death-prone DNA based bodies in well under a thousand years :)

-

This is bullshit.

[brxndxn]

HFT does not help the market in any way. It does not promote the investing of capital. Going into and out of a company in less than a second is ridiculous. Steps need to be taken to stop HFT in its tracks before the whole market is ruined.

This will fix HFT:

1. random delay in all trades.. stick a 100ms to 1000ms delay before all trades are posted on the market
2. tax all trades by a miniscule percentage.. give straight to government debt
3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

Re:This is bullshit.

[Ruke]

You assert that HFT does not help the market in any way. I'd be inclined to agree, but that's really just my gut feeling. Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

Re:This is bullshit.

[Neppy]

3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

THIS. It is total bullshit that if your computer fucks up massively you get a rollback. Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

Re:This is bullshit.

[0123456]

Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

Don't forget 'get bailed out by the taxpayer when you really screw up'.

Re:This is bullshit.

[dcollins]

I think I agree with this. (I'd like to see a counter-argument if anyone has one.) The one nuance is that I doubt the last one would make much difference... whereas the others are constantly active (and clearly need to be dealt with by traders continuously), the latter is more of a "catastrophic execution" penalty that might be ignored for years, and when it does come into play, maybe the business just declares bankruptcy or gets a government bailout.

Re:This is bullshit.

[LordNacho]

I Googled it. Here's a report about what some researchers think:

http://www.tradersnarrative.com/what-if-hft-is-actually-good-for-the-market-4723.html

"That public perception may need to be adjusted according to this recent research by finance PhD candidate, Jonathan Brogaard (Kellogg). The paper looks at the effect of HFT on equity markets and through analysing the strategies used by these firms it considers their profitability, impact on market liquidity and volatility.

There is evidence that high frequency trading contributes to price discovery and liquidity. There is also evidence that it has a minimal impact on volatility and may even reduce it. There is also no evidence that they engage in front-running. HFT demand for liquidity (42.7%) is slightly higher than their supply of liquidity (41.1%) and they provide the inside quote about 65% of the time."

Re:This is bullshit.

[LordNacho]

Someone wants to buy and sell the same stock in the same second. What's wrong with that? He's got his investment strategy, you have yours.

Re:This is bullshit.

[MimeticLie]

Paul Krugman agrees. He argues that the benefits of HFT are dubious, but the costs essentially amount to a tax on anyone who doesn't have access to a HFT system. He also compares HFT to someone who speculates on the market based on confidential information, which has been well established as a Bad Thing for a long time.

Re:This is bullshit.

[sanosuke001]

2. http://www.apttax.com/

Re:This is bullshit.

[j. andrew rogers]

Can anyone provide any kind of source, one way or the other, saying that HFT is necessary, or good, or terribly evil? I'd like to hear what actual economists think of it, rather than just laymen.

The empirical impact of HFTs on market behavior and non-HFT traders has been studied, the following paper for example:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387

From the abstract: "These findings suggest that HFTs' activities are not detrimental to non-HFTs and that HFT tends to improve market quality."

This is in line with the findings of most serious studies. The intuitions of most laymen fail them because they do not understand market dynamics.

Re:This is bullshit.

[Mindcontrolled]

The prime argument against HFT is that indeed the market worked fine before it. Actually, probably better. Not like the stock markets in the 60 or 70s lacked liquidity, which seems to be the prime argument of HFT proponents. HFT does one thing and one thing only - it allows a privileged group to skim money of each and every trade. Pure parasitism.

Re:This is bullshit.

[skaffen42]

3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

THIS. It is total bullshit that if your computer fucks up massively you get a rollback. Keep your winnings if you win, get your money back if you lose. What a deal for the big firms.

I think the HFT people would be the first to support this rule.

Remember the "flash crash"? From what I understand the reason the market went into freefall was that a lot of the HFT folk pulled out of the market when they though there was a risk their trades would be reversed. So they turned of their computers and the liquidity they added to the market disappeared. Result... market goes into freefall.

Re:This is bullshit.

[Znork]

The response you'll get from actual economists will depend on who is paying them.

HFT is in its essence neither good nor bad, but it has various issues. As it currently works it does allow manipulation of values by allowing fake offers that are withdrawn as soon as they're made. They can often see orders before most humans and 'cheat', but that in itself is not exactly 'evil'.

They provide some liquidity, but that liquidity will probably be gone faster than anyone can react in a situation where it would actually be needed and desired. Simply because they need to protect themselves from running amok.

In the end they'll wipe out a few professions, redistribute some wealth and make the stock market even more of a losers game than it is already, but compared to the pseudo-science of central banks the damage they'll do is minimal.

Re:This is bullshit.

[LordNacho]

If they get a bailout, that's a problem with politicians, not the market!

Re:This is bullshit.

[Mindcontrolled]

What's wrong is that he can do it and I can not. A small subgroup of parasites got enabled to leech on the system. Asymmetry, you see? The thing that should not exist in a free market...

Re:This is bullshit.

[LordNacho]

What's not free about it? You're not prevented from doing it...

Re:This is bullshit.

[LordNacho]

Do you want to explain how they skim this money? I have yet to see anyone come up with an example that had anything to do with market reality.

Re:This is bullshit.

[dannys42]

The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers. The researchers may be absolutely correct in their study. However, what the current state of the stock market does do is encourage the "wrong" state of mind for many businesses. It's my belief that going public ruins more companies than it helps for exactly this reason (this would be a human study not a numbers study). People start making decisions based on what they thing the investors want that quarter. And to me, that's the surest way to kill a business, as you've now taken away from your focus on your customers and your employees. So while HFT may increase liquidity and all that good stuff, it's doing so at the cost of the long term health of the company. (Not all businesses fall into this of course, but it appears to be more common than not).

I may not be a serious day trader, but as an (albiet modest) investor, I want a company that thinks long term. And it's my understanding the stock market was originally created for investment purposes. What sort of "investment" is it to put money into company for a second or even a day or a week? I actually think the time window for making trades should be more like one a month or even a quarter or maybe twice a year. With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

Re:This is bullshit.

[bluefoxlucid]

This is in line with the findings of most serious studies. The intuitions of most laymen fail them because they do not understand market dynamics.

The layman explanation for the market is "One person gets richer off another idiot getting poorer." I get rich by selling my overvalued shit to some tard and then buying some undervalued shit from some other tard. Those guys lose money buying high and selling low. Long positions work one way, buy low from idiot who is undervaluing and sell high to idiot who is overvaluing; short positions work by selling high to idiot who is overvaluing and then buying low back from him after he's lost money. As the market cycles, long positions eventually tick over with someone buying high near peak and losing their ass; short positions are taken by the smart investor up at the top, and directly operate along the crash cycle.

Thus it stands to reason that if HFT makes one entity richer, it must make another entity poorer.

Re:This is bullshit.

[H3lldr0p]

If, by law, you mean someone is not prevented from doing it, then you are correct.

However, to become a HFT there are a number of substantial barriers to entry you have to overcome. Not the least of which is that many of the privately held markets require you to buy a seat on them. The price of a seat on the NYSE is currently four million dollars. Not exactly change you can find in the sofa cushions. And then there is the capital outlay for the computer systems, the rental for where to house them, the fiber to the market and whatever it will cost to hook up to their computers, and so on and so forth.

In short, it is for elites only. It is for those who can afford it. It is, in fact, something that you are prevented from doing if you are so inclined to do so.

Re:This is bullshit.

[bluefoxlucid]

In communism, the government holds reins on the market and dictates activity.

In free-market capitalism, big money holders find ways to hold reins on the market and dictate activity.

Communism is arguably better, except that it's really identical aside from trading "vicious, self-serving market leaders" for "brain dead, incompetent market leaders." It turns out putting idiots in charge is just as bad as putting tyrants in charge.

It is thus sensible that we would occasionally look at a situation, knee jerk "That's Not Fair(TM)," and then calmly and rationally begin to investigate the unfairness to determine if we can make it fair without doing too much damage. Every time we try to regulate something, there is a cost ... but there are already economic costs, like the out-of-control prices of college tuition and books, or the decoupling of rental property rates from rental operating costs (if there is more money in the area, rent prices go up and the poor get pushed out--in other words, it will always be expensive to live decently, and the middle class will likely continue to shrink while the poverty line continues to raise). Fixing any of these things is dangerous; they're already broken, but you can do far worse.

HFT is one of these things. It has an economic cost I'm not very interested in (I dislike the practice, but not on any specifically well researched basis), but to regulate it away would also have economic costs. You have to determine if those costs are in excess of the social and economic value gained by eliminating HFT before you even begin to regulate it.

Re:This is bullshit.

[jgtg32a]

I got a better idea, add a $0.0005 sales tax on every share that is bought. National debt could be paid off by next Christmas.

Re:This is bullshit.

[LordNacho]

That is possibly the best fair criticism I've read about HFT yet. But it's only incidental: You say that market liquidity is bad for business, because it causes short-termism. And HFT makes the market better at what is does, so HFT is incrementally damaging for business.

Well, you may be right about short-termism, but I believe the discussion mainly centered on whether HFT was good for the stock market. I agree for some firms quarterly announcements create an incentive that isn't so great for them, but those firms are free to stay private. In fact, there's a whole industry of people who take public firms private in order to run them better. (Interestingly they often unload by going public again).

Re:This is bullshit.

[Bob the Super Hamste]

I would say the should be able to do it but with the same information that everyone else has. They shouldn't get to preview other orders coming in like they currently do. Oh wait that would remove the incentive to do crap like this as they would then be equal to us plebs then and they can't have that.

Re:This is bullshit.

[Taty'sEyes]

Once you allow government to tax a "miniscule percentage", it will become a noose around our necks in three election cycles. The government needs no further ability to rob us of freedom.

Re:This is bullshit.

[Bob the Super Hamste]

The only problem I have is that they have access to information that I don't since they get to preview the incoming orders and execute orders based off of that information before the orders they got to view get processed. How about we just remove that ability and the problem will solve itself. Then I don't have a problem with any idiot who wants to sell a stock in the same second they bought it.

Re:This is bullshit.

[skaffen42]

Taking your points in order:
1. Adding random delays to all trades will make life harder for (some) HFT traders, but will also add uncertainty to all trades. More uncertainty is rarely a good thing in the markets.
2. Ron Paul for higher taxes! (Hey, it's your sig, not mine). So you seem to support Ron Paul with your signature, but at the same time want more government interference because you think the HFT guys are making too much money. And you even want to use taxes to kill their business. The amount of cognitive dissonance is astounding.
3. HFT guys will love this. They usually stop trading when there is a chance of their trades being reversed. So making it impossible will just make it easier for them.

Re:This is bullshit.

[LordNacho]

Sure, I can see how some of those things are worrisome. Especially the bit about education costing a lot.

But I don't really get what your opinion is? We should regulate all these things, or we should sit down and have a think about them?

Re:This is bullshit.

[tacokill]

"tax all trades by a miniscule percentage..."
For a libertarian minded site, I am not sure how #2 can be offered with a straight face. I suppose there are people out there who always want to give the government more money for whatever their "cause of the week" is. However, the vast majority of people feel they give the government plenty of money and have no desire to arbitrarily give them more.

That this was a) suggested and b) modded up shows a painful misunderstanding of the capital markets and how they work. You can agree or disagree with HFT but regardless, the introduction of an arbitrary tax is NOT the correct way to address the problem.

Hint: a transaction tax is a tax on ALL players in the market, not just the "bad" HFT actors you seek to punish. In other words, like other taxes, it will be passed through and ultimately paid by you, I, and the rest of us on this site.

Re:This is bullshit.

[jgtg32a]

...

I see you already had that covered.

Re:This is bullshit.

[Bob the Super Hamste]

My understanding is that HFT get to see incoming orders before they are processed and then react to them. So lets say that some orders come in one says I would like to sell 1000 shares of stock x at $10.00 a share and one of the other orders comes in and says I would like to buy 1000 shares of stock x at $10.01. In this case the HFT puts in an order to buy 1000 shares of stock x at $10.00 a share and then puts in an order to sell 1000 shares of stock x at $10.01 a share. They have effectively skimmed $10.00 out of the system. Now go and do this several million times an hour and bingo you now are skimming truck loads of money out of the system. they probably make even less per share but this is just an example with easy numbers.

Re:This is bullshit.

[LordNacho]

You're talking about flash orders? I find it fishy too, but FWIH it's on it's way out.

Re:This is bullshit.

[LordNacho]

This is not possible in all markets, and is definitely fishy. But also, because most markets do not allow this, it is not the main business of HFT traders.

Re:This is bullshit.

[Mindcontrolled]

It's not only the same information, it is even about the access. HFT has become fast enough to depend on latency, so the real players have their servers in close proximity to the exchange.

Re:This is bullshit.

[Mindcontrolled]

Sure. You get a server close to the exchange to get latency low enough to make it work. Go for it. Oh, and then you pay the entrance fee. It is - by design - for an 'elite' club of parasites that should be taken out and shot without ceremony. But I get it - you follow the classical definition of the 'free market' crowd, interpreting 'free' not as equal, but as 'free to fuck everyone over as soon as you get your hands on some privilege'.

Re:This is bullshit.

[SleazyRidr]

The reason a tax like that would work, is that a proper investor will only have to pay that tax a few times a year, whereas the HFT actors will have to pay the tax several times a second, so it disproportionately hits the short-term "investors" while "rewarding" people who take a longer view.

Re:This is bullshit.

[TubeSteak]

There is also evidence that it has a minimal impact on volatility and may even reduce it.

... except when HFT induces massive market events.

To use a car analogy:
Would you rather have 10 tire punctures spaced out over a year (regular market volatility)
or 1 random transmission failure while you're driving on the highway (HFT volatility)

Volatility from HFT can be reduced, but that requires more regulation that'll more than likely cut into their profits.

Re:This is bullshit.

[aaarrrgggh]

I used to think 1 made sense, but less and less so. All you need to do is add 2-30ms to fsck with competing HFT outfits. But, that still doesn't work as there isn't a single market any more. HFT doesn't really impact non-HFTs much. Sure, I end up paying an extra $20-100 on a $20,000 transaction to get it to execute within a 5-minute window that I can watch while working because of HFT, but ultimately that is the liquidity benefit.

For point 2, all trades are already taxed; what needs to happen is that the government imposes a 1% withholding on all sales transactions, which would erode profits very quickly. It would also encourage more of a long term strategy, as day-trading would be significantly less effective.

And... point 3... sounds nice in the abstract, but some things shouldn't be legal. It is more likely to help the small investor rolling back trades than the large investor. Most large institutions can easily write off losses from a glitch. But when one company's actions (or the interaction of several) causes market turmoil and a flash-crash, logic and sane strategies get hit. If you hold a stock, and are up 40%/$20, a stop-loss order is a common way to protect your gains. You set it below the normal trading bounds, and if every thing goes nuts... it will automatically sell and lock in a 20%/$10 profit.

Stop-loss orders are stupid, but require significantly less sophistication than using options for the same net effect.

Re:This is bullshit.

[bluefoxlucid]

The Politician's Soliloquy is:

• Something must be done
• This is something
• Therefor, this must be done

The first and second are true. It is the third I suggest requires strict examination.

In first, we should be confident that we understand the problem at least reasonably well. This may be miniscule, but that's okay; you can have only the understanding that you see what you see, and that it has implications, and that you know very little of what you're doing, and this is a reasonable understanding of the problem. What is unreasonable is to see the problem and begin proposing solutions immediately with the assumption that you know how to fix it.

In second, we should be prepared to defend both why our solutions improve things and how our solutions will fall against determined evasion, and at what cost. In effect, if we did something right and useful or something only minimally damaging, it is cheaper for the interests we're pressuring to bow to the pressure, and we can assess the effectiveness or the damage done from there; whereas if we did something completely and totally wrong, we should have an expectation of bounded costs that come up as businesses and consumers avoid our regulations by taking the penalty. Often the latter leads to businesses pushing a penalty onto consumers, which we can recognize quickly and move to undo.

And in final, we should continue to examine the effects of the measures we take and adjust them to be more strict, more or less weighted, more or less biased, etc. Narrow or widen profit margins a business can feasibly extract without triggering a penalty, stiffen the penalties so that businesses don't just take it and raise consumer costs to cover, add or remove penalty conditions based on whether some are ridiculous and not helpful or others are sorely needed. In all cases, of course, take the same careful approach: the initial sample should look rather encouraging, but not snap so hard that businesses are universally better off just taking the hit as an extra tax. Find what they'll find agreeable to work inside, then tighten the reins a little to more strongly encourage them to stay in line.

No dictation and no unreasonably stiff or specific penalties should exist without very good reason. Obviously outright false and intentional misleading of consumers, child labor, and the like carries heavy, business-sinking penalties. Overcharging students for tuition, on the other hand, would be better off carrying a tax burden ... or maybe having a bound that works based on operating costs, and a special tax status that reduces tax burden in a significant way. If you overstep that, you lose profits until you raise tuition sharply--which creates consumer outrage. If that's the only way to survive, it should be doable; but it should be seen as bad business sense as well. When the market settles in and you have enough data to see what your impact is on higher education viability (in both small and large, new and established businesses), make the tax penalty stronger to discourage future new business trends that break this plan; at that point, nobody will care because nobody will be triggering those penalties.

It's all very complex. Instead of dictating what businesses should do or making it outright economically infeasible to do certain things, you put up impedance to things you don't want them to do and you give them other, low-impedance channels to stay in line with your ideals. They can fight against your regulations, and that's perfectly fine; they will pay for the privilege, too. Tax incentives and other such baits should draw them into other behaviors, though, as an easier path to follow. If the market strongly disagrees with you, they'll do what you're trying to control anyway; if the market only weakly disagrees, it will shift as you suggest it to.

Re:This is bullshit.

[Toonol]

I agree, nearly everything I read from him seems like its been forced through a political filter. However, I think he's right, here. HFT is like a tiny economic Maxwell's demon, extracting money from brownian motion. It may have some decent effects, but the problem is that the process is only available to certain investors.

If we could all hook our PCs up to the market and make similar high-speed, free, trades, I'd be ok with it. But we can't; this is just a rigged system to profit certain players. It's like most initial stock offerings, only available to major players; not really a free market. If it's not corrupt, it has a strong incentive to become corrupt.

Re:This is bullshit.

[omar.sahal]

Even if this is the case, we'd never know until more research is done and researchers connections with vested interests had been examined. But what we do know is if HFT is very profitable with short term returns, capital will be put here as apposed to other uses. We will be the poorer then as less is invested in our economies and more wealth will be tied up in making money for a small groups. As apposed to being invested in business that employ others and provide incentives to governments to spend on education to remain competitive.

Re:This is bullshit.

[Toonol]

I'm very libertarian, but I'm still fond of taxing trades a miniscule amount. Hell, I would be happier if it didn't go to the government; that way they wouldn't decide to raise it every four years. The purpose of it is not to raise money, but to disincentivize rapid trading. It's like the schemes to tax emails a fraction of a cent per email, just to penalize mass spam emailers.

If 'tax' has bad connotations, have every trade require a certain amount of prime factorizing, or anything to make it burdensome to do thousands of trades a second without hurting any normal investor. Small random delays would be better, though, I think.

Re:This is bullshit.

[ortholattice]

First of all, I think anyone putting in a "market order" to buy or sell is a fool. You're essentially saying to the HFTers (and others) "I'm a chump, rip me off."

Since I invest for the long term and don't care about short-term fluctuations, I almost always put in limit orders slightly below the current bid (if buying) and slightly above the current ask (if selling) and if necessary wait a few days. Only rarely am I disappointed, and worst-case I just adjust the price in a few days if it doesn't get executed.

I never use stop-loss orders, which are essentially market orders triggered by a falling price. I did a long time ago and got burned once when there was a (probably HFT-induced) sudden drop, causing my stock to sell way below the stop price, only to see it recover the next day. Instead, I use stop-limit orders, which - if the price goes below a certain amount - a limit order is created. I have stop limit orders on virtually all my stocks, so I don't have to constantly monitor the market all the time. In the last few years, I have never had a stop-limit order that did not execute (in other words it always recovered, at least to the level of my limit order, from the sudden short-term drop that triggered the order).

As far as I can tell, with limit orders I am immune to HFT, since either I get the price I want or there is no trade. If not, can someone explain to me how an HFT trader can profit from my limit orders?

Re:This is bullshit.

[elsurexiste]

Well, there's the Flash Crash of 2010 in which HFT played an awful part. There's more info (e.g. research papers) there.

Re:This is bullshit.

[carnivore302]

if you are an occasional investor, you don't care at all about HFT, you and them work in a different time frame. As a matter of fact you both help each other. You benefit from tighter bid-ask spreads, they benefit from you by being able to make a couple of extra cents. It's when HFT firms go head to head that somebody loses. Or when you and a fellow investor trade. Only one of you two can be right.

I state that HFT is good for investors, but in all fairness: I work at an HFT firm.

Mark.

Re:This is bullshit.

[pclminion]

What sort of "investment" is it to put money into company for a second or even a day or a week?

I know, right? It's just like banking, you deposit a dollar in the bank and a second later they've loaned that dollar out to someone else! It's insane! What kind of person holds on to a dollar for just a second?

We ought to just get rid of these stupid banks. If I need a loan, fuck the bank. I'm going to talk to my next door neighbor, see if he can loan me $50k for a new boat. Enough of these liquidity-producing middlemen.

Re:This is bullshit.

[zzen]

This comment is bullshit, because it demonstrates lack of understanding what HFT is. Let me explain, why HFT cannot be influenced by decisions that the company makes, regardless how long- or short-term those decisions turn out to be.

HFT is not based on strategic company behavior. HFT is purely based on market patterns, ie. patterns created by physical traders

Imagine that Apple introduces a revolutionary new phone. Investors get excited and start buying AAPL stock, thus starting to raise it's stock price. The HFT algorithms discover this sooner then most living investors and starts buying. It's also faster then physical investors to notice when the demand is tapering off, thus stops buying and starts selling.

This short example both illustrates how HFT improves liquidity for longer-term investors (people seeking to buy AAPL stock now have the ability to do so very quickly from the HFT trader) and how company behavior does not influence the HFT behavior (it is not the introduction of iPhone that triggers the HFT, but the reaction physical investors have to it) and the fact that long-term investment is still the most profitable and not hampered by HFT (if you invested into AAPL at the time iPhone was introduced, you're a happy man today).

Cut the fear-mongering and FUD about technology you don't understand. This is not Slashdot-worthy.

Re:This is bullshit.

[EricScott]

Jonathan Brogaard's paper is based on trading data months before the flash crash. A lot has changed (for the worse) since then. In fact, any research paper about HFT that excludes recent* trading data will be inaccurate. Any group within the industry attempting to use such a paper as propaganda is being less than honest. They should know better.

* By recent, I mean within 2 months.

Re:This is bullshit.

[martin-boundary]

That's an idiotic argument. A pawn shop trader can easily buy and sell the watch, but it will take a few minutes to process both transactions. It simply won't happen within a second.

So where does that leave you? With a made-up analogy that doesn't fit, to justify your personal belief in the benefits of HFT. Don't build sandcastles on quicksand, and maybe you'll have better luck convincing people.

Re:This is bullshit.

[dannys42]

I'm not sure your analogy quite fits. It's more like depositing a dollar in the bank, then turning around and withdrawing it out a second later, just so you can capture that second worth of interest.

Your second paragraph turns it around, because with a loan, the bank is investing in you, not the other way around... so in the stock market analogy, you're the corporation. Just try asking a bank for a $50k loan for 15 seconds and see what they say. There's not a lot of value in it for them, is there?

Re:This is bullshit.

[dannys42]

You're right that there needs to be a real study about it. My point was that there needs to be a study on the "people" side of the problem, not the technology. All too often, we technologists focus so much on the technology we forget about this. And it seems to be as much so (if not more so) in the finance sector.

Have you worked at a public company or one that transitioned from private to public? My general sense has been that CEOs tend to then focus on "what the investors want". It doesn't matter if the investors are people or algorithms. The fact is they've now got the "wrong" mindset for running a business.. second guessing what the "mythical investor" wants vs. paying attention to customers/employees/etc.

Please note, I've never claimed anything I said was anything other than my own opinions. I've also been careful to put "wrong" in quotes to highlight that I'm referring to my own values for a business. It's a perfectly valid business model to aim for short term gains with the sole intention of selling the company. That's just not my personal value for a business.

Re:This is bullshit.

[dannys42]

Please take a step back and re-read what I said. You've argued exactly the point I was not making.

I was not arguing anything about what HFT was doing to stocks, liquidity of stocks, or any such thing. I completely accept that. What I was arguing about was the mindset any "short-term" stock system places upon the CEOs and other decision makers of companies. This is not a technology problem, it's a people problem. The technology is merely enhancing the people problem.

Re:This is bullshit.

[LordNacho]

Ok, have you got such a paper?

Re:This is bullshit.

[LordNacho]

But this is a very general fact about any business that's new: nobody knows whether it will provide anything useful, and it's very possible that only a few benefit.

Re:This is bullshit.

[LordNacho]

'free to fuck everyone over as soon as you get your hands on some privilege'

You mean no different from any system of governance?

Re:This is bullshit.

[julesh]

I got a better idea, add a $0.0005 sales tax on every share that is bought. National debt could be paid off by next Christmas.

Doesn't work. Here in the UK, we already have such a tax (and at a much higher level than you suggest). It just means people sell their shares to services that then let them own and trade virtual shares that give you the right to buy them back at a later point.

Re:This is bullshit.

[Mindcontrolled]

Indeed.

Re:This is bullshit.

[carnivore302]

HFT would immediately offset this by quoting wider. Therefore the investors would pay a bigger big-ask spread. HFT will (after the tax) still profit as much as they used to do.

Re:This is bullshit.

[swalve]

"Investment" doesn't have a time limit in one direction or another. The market provides liquidity and flexibility. Instead of having to buy whole companies, you can buy parts of one. Instead of having to own a company through the whole of its run, you can own it for shorter terms. Every investment has another side, the seller who is realizing a gain or a loss. There would be no market if there weren't people looking to cash out alongside the people looking to invest.

Companies with short term goals like that fail. Companies with long term strategies succeed. That's how it always works, eventually.

Re:This is bullshit.

[swalve]

I think you are over estimating the amount of time CEOs think about the stock prices. In the first place, the CEO is beholden to the board. In the second place, the CEO's job is to increase the value of the company, not the price of the stock.

Re:This is bullshit.

[swalve]

One interpretation of that is that the HFTs turned a Black Friday style market crash into a minutes-long glitch. I mean, everything was back to normal an hour later, wasn't it? The only people who lost were the silly humans who decided to sell into a losing market.

Re:This is bullshit.

[swalve]

HFTs don't get to preview orders.

Re:This is bullshit.

[swalve]

When is the last time the feds raised taxes?

Re:This is bullshit.

[DerekLyons]

The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers.

Since numbers are the topic... how exactly is this a problem?
 
I ask since you don't actually expound on the issue, but rather your segue in a karma whoring rant about the market.

Re:This is bullshit.

[Thing 1]

With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

Someone else mentioned taxation, and I think that would be a better solution than "you must keep your equity for X increments of time", especially on a sliding scale: hold for less than a second, tax is 90%; less than a minute, tax is 80%; less than an hour, tax is 70%; less than a day, tax is 60%; less than a week, tax is 50%; etc. The timing and percentages might need tweaking but the idea is to provide an incentive to hold for longer periods of time, while allowing those who could still profit from their trades to make money, and have a larger tax burden, which both discourages the shorter-term trades, and also helps us to pay our national debt. It can be argued that it's them that got us into this mess, so it makes sense for them to pay to get us out.

Re:This is bullshit.

[X-Gamer]

Yah, it's called capitalism. You find ways of doing things more efficiently and profit from it, less efficient ways are eventually phased out. You wouldn't say a company that has found ways of using computers to improve production efficiency is a tax on its less innovative competitors. So why should this be a special case?

Re:This is bullshit.

[dannys42]

Ah... Nice idea. I really like this actually. It allows the people who really want to do it continue to do so at a cost, while encouraging the "correct" behavior.

Re:This is bullshit.

[dannys42]

Are you sure "investment" doesn't have a time limit? I mean if you wanted to start a company, and I say I'm willing to invest $1000 but only for 13 microseconds. Does that help either one of us? I understand you can say that it allows you to pool together lots of investors and minimize risk... but let's say you have a million investors willing to invest $1000 for 13 microseconds... Well now you've got $1000 to spend for 13 seconds. I'm sure I'm missing some clever financial way of thinking about things... but I just fail to see how this provides me (an investor) with any substantial benefit or you (someone theoretically wanting to provide a useful product/service to people) with anything substantially useful. This whole mechanism to me only seems to server one purpose and that's a pyramid scheme for big institutions to shuffle money around.

Companies with short term goals like that fail. Companies with long term strategies succeed. That's how it always works, eventually.

Yes. But my argument is that short-term windows encourage business owners to focus on short-term success... essentially driving them to failure. You could argue that's just the way it is and they shouldn't have been in business if they didn't know how to run it. But my question remains, why have a system that encourages "bad" behavior in the first place?

Re:This is bullshit.

[dannys42]

The board members also tend to think this way. Hence my phrase "CEos and other decision makers".

I agree this is all opinion. But out of all the people I know (myself included) that have worked in startups, private companies, public companies, etc... I don't know anyone that's actually made any money off an employee stock purchase program, for example. Maybe I just have really unlucky friends. I saw this exact sort of thing happen at the last company I worked at... where the CEO's public statement was to "increase the value of the company" and all that good stuff... but it really seems like they were more focused on increasing the stock price.

I've since left the company, and my new company seems to be a lot more reasonable. So it's certainly not always true. Again, I'm merely stating that the short-term nature of stocks seems to encourage short-term success. Some leaders (CEO/Board/President/etc) can do well despite this, but many don't appear to.

Re:This is bullshit.

[jafac]

HFT is deemed beneficial and necessary.

mainly, we've come to rely and depend on it on such a scale, that we're now, terrified to regulate or ban it. (much like with derivatives in the 1990's) - lest we "tamper" with some beneficial uknown in the market.

However, the benefit that HFT offers is that it mitigates risk for the very large players, by providing automatic small-scale reactions to very sensitive changes to widespread markers in the market that human traders can't possibly track or monitor.

(on the other hand, there is NO reason that the instrumentation available to HFT programs can't be made available to a human trader, in the form of some kind of infographic or dashboard - and allow a human to make the decision to trade, based on a machine recommendation. . . . IF there is some kind of regulatory action against HFT at some point.)

Does HFT creep a lot of people out? Sure.
Probably especially people who use automatic checking-account payments, and who have been screwed-over by accidental double-billing, or payments unexpectedly not-clearing in time, or unforseen overdrafts. The point is - the online checking interfaces provided to customers BY the banks, are crappy ON PURPOSE, so that they can make fees. You stick your dick in a machine, and it gets cut-off.

But HFT algorithms are designed with safety in mind, for the operators' side of the interface. (not necessarily the REST of the market though). That doesn't mean that they don't or can't ever fuck up, and screw the investor over. Tough luck, right? Flash-crash, anyone?

There are a lot of reasons why these things ought to be banned. Creeped-out feelings and lack-of-understanding isn't one of them. But they shouldn't be banned "because they're soulless machines". They're just tools. What needs to be scrutinized is the overall market, and trading practices - the purpose it serves in our broader economy, and how we all benefit or suffer from those practices.

I have to obey a speed limit when I drive to work. Both for my own safety, and the safety of other drivers. If I had a robot driving program that allowed ME to safely drive 200 miles per hour, it would still be unsafe for other drivers. I think a car-analogy is a perfectly acceptable analogy in this case.

Re:This is bullshit.

[jafac]

Well, that's true - and this all kind of goes back to Euler's number (base of the natural logarithm) which was originally discovered by computing the instantaneous interest derived on a loan (rather than periodic interest).

Lenders were actually generating obscene amounts of undue profits by charging extra rounded-off interest by charging for the period of the loan, instead of instantaneous compounded interest. Euler proved that this practice was unfair, and revolutionized lending, (and mathematics), when he discovered the natural logarithm. But when you loan somebody money for 5 years, you loan it to them for 5 years, even if they make monthly payments. . . Euler's number calculates the amount of interest for the smallest time interval (which approaches the same amount, for one-over-infinity).

So - looking at an investment, as a loan, and looking at a loan interval as a unit of time, in-fact, IT *IS* VALID, to cut it down to infinitely small units of time. And that's what algorithmic traders are trying to do - shave off every last penny of profit from those rounded-off moments in time.

This is why the market was changed from fractional dollar amounts to decimals a few years back. To allow computer-driven trading. No computer could calculate 1/3 or 1/7 cleanly. So now, those amounts simply do not exist in decimal form. They're all quantities that boil down to binary units that a CPU can deal with in real-terms, when calculating trades.

Now - when you talk about getting rid of these stupid banks. . . that's a whole 'nother argument. Google "Bank of North Dakota" for an interesting alternative.

Re:This is bullshit.

[Thing 1]

Thanks! Most of my ideas (of late) are similarly well-rounded; comes from years of weather, I suppose. :)

Bonus

[0123456]

So what happens when the algorithms start demanding a billion dollar bonus before they'll turn up to work?

Re:Bonus

[PickyH3D]

Then you unplug the self-aware machine.

Re:Bonus

[ka9dgx]

So what happens when the algorithms start demanding a billion dollar bonus before they'll turn up to work?

At that point, QE15 will be underway, and $1000,000,000 US will pay for a few minutes worth of power for the computer. Gold will be $10^12/ounce.

Additional regulations

[Halo1]

Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets

Like making it illegal for humans to beat the algorithms?

Algorithmic Trading is not trading

[lecheiron]

its stealing money from peoples wallets. with algorithmic trading, it is no longer an orderly market.

Re:Algorithmic Trading is not trading

[Erbo]

It is absolutely this. I would go so far as to say that no individual investor has a chance in the markets when going up against these HFT algorithms run by the big banks and trading firms. No matter how good your analysis or how closely you watch the market like a hawk, you're going to be screwed, blued, and tattooed.

And this comes at the same time as The Fed and Chairsatan The Ben Bernank have pretty much destroyed all "safe" investments through manipulation of interest rates, forcing people to turn to the stock market if they want any hope of any kind of significant return on their money...and where they can be fleeced by the HFT algorithms and the bankster fraudsters. Not to mention destroying the purchasing power of those dollars via "quantitative easing" (read: money printing) games.

Probably a good time to invest in precious metals. No, not gold, silver, and platinum. I'm talking steel, lead, and brass...in appropriate forms, of course.

Re:Algorithmic Trading is not trading

[Dunbal]

No matter how good your analysis or how closely you watch the market like a hawk, you're going to be screwed, blued, and tattooed.

I beg to differ. Trading is all about the banks taking out the stops. Once you learn where the soft stops are, you can make money, since you will be trading in the same direction as the big brokers and banks - so long as you stay small enough to not be seen as a target yourself.

Re:Algorithmic Trading is not trading

[cheekyjohnson]

Humans can't beat them easily. Therefore, it's theft of existing property.

Re:Algorithmic Trading is not trading

[Erbo]

Trading is all about the banks taking out the stops.

And the HFT algorithms, in order to do so, deliberately manipulate the prices of shares, by stuffing the channels with quotes for bids and offers that the algorithms have no intention of executing.

Under long-standing law, any pattern of orders intended to manipulate the price of a security, as opposed to actually buy it or sell it, is illegal.

Where are the damn COPS? Where are the indictments, and the handcuffs, and the perp walks? Why aren't there bankster fraudsters currently doing time in federal PMITA prison for this?

Of course, you know the answer. The regulators have been co-opted. The government is looking the other way. And the "little guy" gets screwed. Again.

For more information, you'll want to look at Nanex.net's "Flash Crash Analysis" page.

Re:Algorithmic Trading is not trading

[swalve]

No, that is ridiculous. Every trade happens because there are two willing participants. I have stock to sell, someone else wants to buy. Nothing happens unless we agree on the price. Doesn't matter whether I sell to Joe Sixpack or tradingmachine34245.rack34.silo12.nyc.bigfirm.

Re:Algorithmic Trading is not trading

[ftobin]

And this comes at the same time as The Fed and Chairsatan The Ben Bernank have pretty much destroyed all "safe" investments through manipulation of interest rates, forcing people to turn to the stock market if they want any hope of any kind of significant return on their money...

If safe investments are "destroyed", how come 10-year notes are at an all-time high? If you were in safe investments before Fed made any decision to lower rates, you would be doing great. Why would you decide to go into into safe investments *now*? Buying high, sell low?

Anyways, if your concern is inflation, that's what TIPS and I-Bonds are for.

Awesome...

[RobinEggs]

I've never been convinced that HFT is anything but a scam to make institutional investors more money without doing more research or making more socially responsible investment decisions.

The company worth truly investing in, in the sense that you hope it survives and hope it continues to grow as opposed to only making you lots of money, is the one that will treat the environment, their employees, their supply chain, and their customers with respect while paying investors and owners a respectable return.

HFT algorithms don't give a fuck about any of that, exactly like the stereotypical Wall Street broker doesn't care about any of that; in fact HFT algorithms were written when brokers realized they could make more money in corrupting and managing young mathematicians than in doing their own jobs. HFT just further emphasizes empty, short-term speculation without regard to the product sold, the behavior of the company, or the future potential of the company. It enables the irresponsible greed of people who just want to make a dollar in the next day to become the irresponsible greed of people who just want to make a dollar in the next 0.0000000001 seconds.

Re:Awesome...

[FoolishOwl]

If investment decisions are better made by computer program than by human investors, what justification is left for private ownership of capital? And what's the argument against planned economics?

Can we have another look at the idea of democratically deciding upon our social priorities?

Re:Awesome...

[RobinEggs]

You are absolutely right that it is empty short term speculation. In fact, that's why its so great! These strategies don't depend on being right about a stock. You should realize though, that these guys aren't moving the market to any real degree.

Are you simply an anarchist then? Excuse me, I guess economic anarchists prefer the term 'libertarian'.

That they don't move the market is part of my *point*. They don't do anything useful. Ever. They make millions of dollars without *ever* actually investing, and their actions aren't even visible until they fuck everything up. Not to mention that for all the talk of market making and minor movements I hear from defenders of this kind of trading, what they take when they cash out isn't mere pennies or good feelings about having quasi-stabilized something, it's cold hard cash that someone else put into the market. They got money for specifically *not* investing that other people, acting in good faith, put into a system supposedly designed and regulated to reward investment. You can complain that I don't understand it all you want; your explanation doesn't make me feel that there's anything good about these practices to understand.

I certainly realize that manipulating and speculating is always part of the game; I violently disagree with any policy or loophole that makes it a totally acceptable, formalized activity.

There have always been players in the market that use speed to trade and profit. Nobody started complaining about it until it was on computers and they didn't really understand it anymore.

I find it very hard to believe that no one disliked tedious, high-speed manipulations of the market before computers were involved. Parasites are such whether they use computers or not. It's certainly more *obvious* to people now, what with incidents like algorithmic trading systems literally destroying the world economy for a few hours at a time, and I think it's that kind of high-profile that makes people complain about it more now, not that it's suddenly different and scary with computers involved. Plenty of other people have skimmed profits and destroyed economies without computers; they weren't hated less for the fact of their technological transparency.

Re:Awesome...

[jd]

I'm not sure you can call it a scam, per se. What it does is soak off money from the system in very small amounts but in very large quantities. It's not much difference than a bank taking all the rounding errors in calculations and transferring the surplus to themselves. It may be fractions of a penny, but multiply it by enough calculations in a day and it's likely worth a few million.

It's not really a "scam" to redirect all that to yourself. A theft, certainly. Blatant corruption without doubt. "Scam" implies others are being fooled, but here they're just having their pockets picked.

Re:Awesome...

[giorgist]

Very very good point ?!

Re:Awesome...

[zzen]

Both this and the parent comment are FUD that is sad to see so highly promoted on Slashdot. It is fear-mongering over technology you don't understand, neo-ludism.

HFT does not replace long-term positions. It cannot. While HFT does make up a lot of VOLUME of sales, they are of absolutely negligible in terms of profits and don't end up having nowhere near the same proportion of profits as the long-term position traders.

- you believe that long-term trading is somehow obliterated by HFT - but the vast majority of PROFITS (not VOLUME) are still realized in long-term trading
- you compare HFT to a Wall Street broker (the whole point of HFT is that it's NOT a physical, slow broker)
- you believe HFT means "computers make investment decisions" (they don't, look it up, HFT company is defined by having virtually no positions at the end of the day)
- you believe this somehow undermines private ownership (see above)

Your hysteria around HFT can be compared to an ludite breaking an early telegraph machine just because he's scared it can read radio morse code signals faster then a human can - and believes that it means the end of people talking to each other, only machines will do the talking from now on. Somewhere along the way, he fails to realize it's still humans talking through the machines, which just amplify their abilities.

It is a sad day when I have to preach about this on Slashdot.

Re:Awesome...

[RobinEggs]

I don't actually believe any of those things you listed... to dismiss the obvious I understand quite well that HFT involves not holding positions, and I hope no one misunderstands the difference between a computer and a broker.

Most importantly I understood from the beginning of this conversation that long-term trading still dwarfs the total economic impact of HFT trades. I understand that HFT realizes a tiny fraction of the total profits earned on Wall Street, and I'm not concerned that they'll overtake real investing. I simply believe that the money earned by HFT is effectively skimmed from legitimate transactions rather than being legitimate unto itself: Paul Krugman likened it to a method for private entities to tax the market.

So I get that it's relatively insignificant, but I also think it serves no beneficial purpose whatsoever; a cancer need not be large or terminal to be worth removing.

Re:Awesome...

[martin-boundary]

All of that can be done with central planning. Just have two or three teams of central planners developing competing computer subsystems to control the economy.

You can't have it both ways: either algorithmic trading is superior to human decision making, in which case this proves that algorithmic economics can also be superior (and therefore we should switch to central planning and optimize that), or else algorithmic trading is inferior to human decision making, in which case there's no harm in regulating/penalizing/outlawing various trading algorithms on policy grounds.

Re:Awesome...

[swalve]

it reminds me of an episode of The Office I saw the other day. Andy was trying to sell his Xterra. Dwight made an aggressive offer, and Andy accepted it. Dwight washed it, and put it back on the market at a higher price. Dwight might have been an asshole, but he didn't steal from anyone. Andy was free to say no to the offer.

Somewhere along the way, he fails to realize it's still humans talking through the machines, which just amplify their abilities. It is a sad day when I have to preach about this on Slashdot.

Based on what I see on Slashdot, computers are for amplifying MY power and limiting everyone else's.

Re:Awesome...

[benhattman]

That's absurd. There are bazillions of technological advancements that happen every year. If someone supports all but one of them, suddenly they become neoludites? Get real.h

People don't like HFT for essentially two reasons. First, it makes it clear just how much of an advantage the Street has over regular Joes. Thirty years ago, I would have known the wall street investor was more informed than me, but at least he was still human. Second, despite claims that HFT does not increase risk, we've witnessed market irregularities in the past which have been blamed on HFT. We have even seen trades get revoked due to algorithm errors.

Mostly, though, what is the benefit to society of HFT? How much wealthier am I because of it? And at what price (or risk)?

Re:Awesome...

[jafac]

It's roughly equivalent to: A landmine doesn't give a fuck who stepped on it. It's blowing a god damned foot off right fucking now.

Restatement of an old maxim

[russotto]

There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

Or, in other words, "To err is human; to really foul things up requires a computer"

Re:Yawn

[h4rr4r]

Nope, then they declare the computer made a mistake and they roll back the trades. If they really fuckup they get the government to bail them out with your tax money.

Time for rethink

[Princeofcups]

The real question is: what was the original purpose of the stock market? What problem is it trying to solve? I guarantee that letting people make money by micro-trading of stocks based on nothing but trends and volatility is not it. It's time to rethink the whole system, but wait, there's a trillion dollars and the stability of national economies at stake. We're stuck with it, short of some kind of (permanent) revolution.

Time to go read more Trotsky.

Re:Time for rethink

[TubeSteak]

The real question is: what was the original purpose of the stock market? What problem is it trying to solve?

Price discovery.
The entire point of having a market is to find out what the listed items are worth.

HFTers are not in the market to advance this purpose.
I'll admit that, as a byproduct of their arbitrage, they help.
BUT, allowing HFT to continue trades market volatility for market efficiency.
Considering how lond and hard we've worked to reduce volatility, I suspect it is not a reasonable trade off.

Re:Time for rethink

[aaarrrgggh]

I like the stock market as it is, because without that much work I can make 30-100% annual gains. Without that opportunity, there would be no opportunity for "safe" mutual funds to make a 5-10% return. Without a 5% return, why would you put money away in your 401k? Without money in your 401k... what do you do for retirement?

Oh yeah... Trotsky.

Without reasonable liquidity, stocks become the same kind of investment as a house... and a house is a miserable investment.

Stock markets are just legalized gambling nowadays

[msobkow]

The stock markets are no longer about investing in companies you believe in or who have a solid track record. It's just computerized gambling.

Hey Now!

[ThatsNotPudding]

Those Wall Street millionaires are barely making ends mink!! Meet; I meant meet.

Humans wrote the algorithms...

[RL78]

so we are still trading, the computer is just doing the grunt work.

Horrible change in Wall Street culture

[GodfatherofSoul]

To previous poster, the stock market is fundamentally designed to put people with cash on hand in touch with entrepreneurs with a need for investment capital. This is NOT what's happening here.

We had a client who bought one of our software libraries about 7-8 years ago and needed our help to build a trading app that employs these silly algorithms. These flash trading algorithms are exploiting market fluctuations that have little to do with fundamentals and sound investments. First you find a statistician to find stable market blips. If you've got instant access to the markets and wads of cash, you can exploit the fact that (hypothetical examples) there's a 2 hour dip in tech stocks when most IT staffs are in their Monday morning meetings. You can exploit the fact that private schools have orientation every 3rd Friday in August, so the NYC big wigs are all taking their kids to class and markets dip. Or that, on the Friday before the Super Bowl, Frito Lays sales spike for 4 hours because people are stocking up on chips for the game.

It's electronic money and I shudder to think what elements of our economy are being squeezed to generate it. The only thing that'll change this culture is to regulate flash trading out of existence.

Re:Horrible change in Wall Street culture

[immakiku]

The stock market is actually a secondary market. The entrepreneur who needs capital can get it through private investment or through an IPO. The stock market provides liquidity to those who already own (either initial founders or later investors) shares in the company; by liquidity I mean it allows those shareholders to turn the wealth represented by ownership in a company into cash by selling shares. On the other side buyers in the stock market hope that the wealth represented by owning shares in a company will go up as the company grows, or hope that the company will make profit and pay some of that back in the form of dividends to all part owners.

So if we can agree that there's a societal need for entrepreneurs to raise capital through giving up equity, we can agree that there's a societal need for the stock market to contribute to liquidity of such equity. And if we can agree to that, we might agree that any way inefficiencies can be weeded out of such a market is a boon to society. That last sentence is fundamentally the question that people are trying to investigate: is HFT contributing more to the stability of the stock market than the value it extracts? A free markets proponent might say that if they're still in business, that must be the case, but a counter point would be that the market is not constructed (regulated) in such a way that allows the true worth of an action to shine through. I think that's a question everyone's been trying to answer.

Re:Stock markets are just legalized gambling nowad

[LordNacho]

And gambling is wrong?

Apparently they are unaware of the 1000 point drop

[Bob the Super Hamste]

There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage.

Apparently they are unaware of the 1000 point drop in the Dow last year that appears to have been caused by HFT.

Re:Stock markets are just legalized gambling nowad

[Bob the Super Hamste]

No I don't see gambling as wrong, but lets tax it like gambling instead of capital gains. That would put an end to it real fast.

Re:Apparently they are unaware of the 1000 point d

[Kell Bengal]

That's what happens when you flip the stock market over and attack its weak spot!

Re:Stock markets are just legalized gambling nowad

[Bob the Super Hamste]

Yes and no. For those on Wall Street it is like gambling (specifically like playing black jack and knowing what the dealers down card is and what the next 10 cards in the shoe are) but for regular people who have investments for retirement and other long term goals not so much.

"Both benefits and severe risk"

[GameboyRMH]

Benefits: More money transferred to the very wealthiest individuals as traders who can't afford HFT servers (physically as close to the trading floor as possible - at these speeds, light is too damn slow) are at a severe disadvantage.

Severe risks: Potential for total economic collapse to take place in the blink of an eye.

I punch those numbers into my calculator and it makes a frownie face.

Re:"Both benefits and severe risk"

[julesh]

what if you figure out the algorithm? Then you could predict the market?

Only if you can get the same inputs as the algorithm has and execute it faster than the HFT trader does. Which is to say, no.

Re:"Both benefits and severe risk"

[GameboyRMH]

Give this a read:

http://slashdot.org/~mcgrew/journal/269468

Now imagine that instead of "responsible" human beings doing the trading and relaying information via old-timey stock tickers, it's supercomputers in a real-money hacking competition connected with InfiniBand. I pointed out what would happen in my comment on that journal.

Re:Stock markets are just legalized gambling nowad

[LordNacho]

And why should we end something that we don't think is wrong?

Also, why does gambling still exist? Surely something is not right.

How they skim off money

[wolvesofthenight]

It works something like this:
1) Someone invests money, holding the stock for many years.
2) They decide to sell it
3) N high frequency traders buy it from them, on average making a bit of money.
4) Eventually another long term investor buys it. On average, for what the first guy sold it for plus what the HFT people made.

Thus, the money they skimmed off should have either gone to the first long term investor or kept by the second. They are both doing something useful. The HFT guys are not.

Re:How they skim off money

[LordNacho]

Actually, what you are describing is called market making. That mechanism does not depend on algorithms. It would exist even if there were no computers involved.

And actually, the MM IS doing something useful. If you show up on day 1 and want to sell, but there's no MM, the guy who shows up on day 2 and wants to buy will also leave having not traded. The MM is carrying over the risk between periods of high supply and periods of high demand.

Re:How they skim off money

[wolvesofthenight]

I never said that computers have to be involved in HFT. That simply depends what frequency is considered high frequency and if human reaction time can meet your definition.

Market making: you could define HFT as market making with holding times less than X second(s). I claim that HFTs are not doing something useful because of the extremely short time they hold the stock. Just about any long term trader will be OK waiting a few seconds for a transaction to occur - and many of them would be happy waiting far longer. So they don't need HFT to provide for transactions in the sub-second range.

If you slow down HFT enough it could become valuable as market making (and it will no longer be high frequency). How slow that has to be depends on how patient the long term investors are when they decide to buy and sell.

Personally I think that stock purchases and sails should be based on a solid analysis of the merits of the company combined with the finical needs of the investor. The result being that stocks don't change price very quickly, and most people are happy waiting hours or even few days for a trade to take place. Thus, there should be little need for market making. Though there would be room for market makers operating with daily to weekly holding times.

Sadly, I suspect that trading speed will keep increasing well into the VHF and the UHF range.

Re:How they skim off money

[tlhIngan]

It works something like this:
1) Someone invests money, holding the stock for many years.
2) They decide to sell it
  3) N high frequency traders buy it from them, on average making a bit of money.
  4) Eventually another long term investor buys it. On average, for what the first guy sold it for plus what the HFT people made.

Thus, the money they skimmed off should have either gone to the first long term investor or kept by the second. They are both doing something useful. The HFT guys are not.

That's how the market works. When you sell shares, you set the price to which you want to sell them at. It can be at the last traded price (the one you see), it can be higher, or lower. The seller sets the price. And when a buyer wants to buy, they set the price at which they will purchase at. This is called the bid (what the highest buyer is willing to pay) and ask (what the lowest seller is willing to sell at) spread.

What happens now is that the stock doesn't trade unless someone is willing to BUY it at the price. That someone could be the purchaser you mentioned, or an HFT computer.

You didn't specify how long the time is between the time person A wants to sell, and person B wants to buy. But let's put numbers to the example.

Let's say the last trade price is $10. The seller wishes to sell 1000 shares at $11. The buyers want ot buy at $9. No trades happen because the sellers aren't willing to sell that low, and the buyers aren't willing to pay that much.

Now, let's say some crazy seller decides he had enough and sells all his shares for $9. The trades happen, and let's assume that the buyer's purchase is satisfied (the buyer gets all the shares he wanted). The next-highest buyer is bidding $8.50. So we have Last Trade $9, Bid $8.50, Ask $11. (If the buyer's trade wasn't fully satisfied, the only difference is the Bid is $9 instead).

This can repeat ad-nauseum - perhaps another seller comes and sells his shares for $8.50.

That's how it works. In your instance, you assume the seller and buyer could come together and make a deal. It may be possible, or it might not, depending on how the stock "moves" in the intervening time (if other trades happen). If no other trades happen, there can be a standoff - the seller wants to sell, but no one is wanting to pay his price. The buyer wants to buy but doesn't want to pay what the seller wants.

If the seller needs to sell his stock immediately and can't wait for the buyer, he'll have to drop his price accordingly - either by lowering the ask and hoping a buyer raises their bid, or by allowing the trade at the buyer's bid. This can be very harsh if the bid-ask spread is large and can cause volatility as sometimes you're desparate to get rid of stock to liquify your holdings, which can depress the stock price (last trade) and make the stock go down unnecessarily. Or the other way around - some buyer wants to own the stock really badly, and pays whatever the price is being asked for. This happens randomly as people sometimes need emergency cash, and others irrationally believe something is going to happen.

All HFT does is insert someone (a trader) who basically puts in bids and asks (market movers). They'[re called that because they help "move" markets about - big bid-ask spreads lead to high-volatility stock and low trade volumes as the buyers and sellers are far apart in their valuations. But a market mover trader goes and bids higher than the current bid, hoping a seller decides it's "close enough" and offers to sell at the new bid price. The market mover then goes and sells it higher, hoping to be under the price of the next-highest ask, hoping other bidders come and join in the trade.

Thinly traded stocks have poor liquidity - it's hard to turn that stock into cash. HFT or market movers hope to make quick profits, but they also add liquidity so sellers willing ot sell get their money instantly, and buyers want to buy can get the stock they want. It's easier to convert stock into cash, and becuase of the way the HFT operates, the bid-ask spread narrows, which is good as it avoid

Re:How they skim off money

[wolvesofthenight]

In short, you are saying that the HFT people make it easier for the prospective long-term buyers and sellers to come together to make a trade - both in time and location.

In the case of HFT with holding times under a day I disagree with there being any value added (and the ones everyone is upset about are down in the sub-second range). The system of people posting buy and sell prices allows time for a buyer to come along after someone decides to sell. As for bringing they buyer and seller together, that is the job of the broker. It is what they are paid to do, and they were quite able to do it back before HFT. (though computers make the brokers job far easier, and I don't blame brokers for using them)

Re:How they skim off money

[LordNacho]

The high frequency of trading has a lot to do with the business of market making. You're obliged by the exchange to provide prices, so if you can't move them often, you're more likely to get run over. If you're more likely to get run over, you make wider prices. That's not good for the end customer.

Now, suppose you do have an investor who's done the analysis. Those guys tend to be funds that trade in big size. When one of them comes in with a trade, what's the market maker supposed to do? The answer is that the MM doesn't do his own fundamental analysis and stick to that price. That's not sensible when you're obliged to make a price. What if you're wrong by a dollar? You'll be wiped out. The MM will sound out the market and try to disperse the large order to the rest of the market, including other MMs. This information transfer needs to be fast, or the risk of holding a position will grow. Bear in mind the MM knows the client finds it profitable to cross the spread.

Simple Fix

[Overzeetop]

This is one reason we should go to a gross receipts tax. If you had to pay 3% on every dollar you received from any source, it would make HFT impossible, along with most day-trading. Someone who actually invests in a company, and receives dividends (taxed at 3%) then sells 10 years or more later to either choose a new investment strategy or to become liquid, would only pay 3% of the receipts, and probably far, far less than normal taxes today.

Your broker chain - who you presume is actively working to get you profits - is getting 4% of the gross for "investing" in that mutual fund, rather than taking a percentage of the profits. Ever wonder why there seems to be more profit to be had on Wall Street than in Washington DC these days? Yeah, me neither.

Re:Simple Fix

[Opportunist]

An even simpler fix: Tie that tax to the length the investment is held. Sell it immediately? Hand over the profit. Keep it for 10 years? Keep all the profit.

Re:Stock markets are just legalized gambling nowad

[Overzeetop]

Yeah, for long term investors it's like being the house when the guy sitting at the table playing black jack and knows what the dealers down card is and what the next 10 cards in the shoe are. Usually, the house takes those guys out back and breaks their knees, but it this case, the guy at the table happens to already own the knee-breaking-guys.

Fundamental Failure

[roman_mir]

The fundamental failure in this case is the failure of approaching the market from investor perspective, and this fundamental failure is incentivized by free money, just like the insane CEO pays and non-existing dividend yields.

The very reason WHY it is at all possible to trade stocks at these insane speeds is this: people do not see their purchases as investment, they are not looking for or getting dividend yields.

People who are purchasing stocks are not looking for an investment opportunity in the underlying business, they are looking for a way to flip the stock quickly and to make the money.

Automation of this process is INEVITABLE as all things that are repeatable and can be automated with some investment capital in order to make the process more efficient will be done. Investments will be made. Automation will remove the slow element in the equation - the human trader.

The fact that the stock market is now not providing investment opportunities, but is instead used to gamble in the hopes that the stock will move in the right direction (up or down), is based on the available amount of free (interest free) money that is provided into the financial system by the Federal reserve bank.

At this point that Bernanke promised to keep interest rates at 0%, expect more and more automation to happen in HFT, it is an inevitable result of this moral hazard.

The fact that the money is being debased quickly, and the so called "economists" - the modern era witch doctors of the kings are promoting this debasement and the fact that the majority of people are buying into this idea, that money needs to be destroyed and stocks are there for gambling and not for investment (not for business participation and not for dividends to be paid), this fact will also provide more space for this further perverse action.

The free money create incentives to gamble, destroy incentives to save, and people (here, on /.) are celebrating this very fact, while amusingly at the same time being perplexed and angered by the wider and wider spread of HFT.

In order to fix this problem, what should be done is the Federal reserve bank must be prevented from further debasement of currency. The market must be allowed to set the standards on what money is. The interest rates must be set by market pressures, not by government decree. Government must stop issuing debt that it cannot repay and it must liquidate the debt that exists.

Only this will allow the currency to become valuable enough to be saved, it will create competition pressure between sovereign debt and the corporate bonds, this will force the companies to pay an actual INTEREST on the bonds - DIVIDENDS, which will in turn lower the pay that the CEOs and other management gets out of profits and simultaneously this will allow the markets to become investment vehicles again, instead of being giant casinos.

---

Obviously, this again, will not be a popular or an understood opinion here, but it must be said.

HFT, the newest double edged sword

[TiggertheMad]

The algorithms are just extensions of human judgement. Certain patterns in stock signal that price move is occurring or is about to occur.

...Or it could be chaotic noise generated by the interactions of multiple HFT programs. HFT has a benefit that is added to the market, that is it makes trading in a market place with them a completely liquid proposition, in that if you are willing to buy or sell at the right price, you have a traders whenever you need them. They also cause market fluctuations on a second by second basis, making it pretty much impossible for a human to 'beat the system' over very short time periods barring any logic exploits or bugs in the algorithms. Which is fine in my mind, because multiple HFT algorithms used by different actors will offset gains created by employing them for short term transactions, and people really should be looking at long term trading in the market anyway.

Some people complain that they are skimming profits from investors by adding additional costs, but really what they seem to be doing is causing a discreet (step like) graph smoother by adding in additional price points. Keep in mind that while they cause a buyer to get less of a profit while buying into a rising stock, they also can prevent a seller from losing as much when selling off a falling stock. It is a two way street.

The real thing to be concerned about in my mind, is that markets are inherently chaotic (in the math sense of the word), and using an algorithm to conduct trades in such an environment is just asking to lose money. And that is fine if you are a private investor playing with your own money, it is very worrying when you are playing with mutual funds, 401ks, etc that have large numbers of people's saving in them. Most people don't have a real grasp of chaos math, and software algorithms, and as a result don't realize the risks that are involved with HFT.

Re:HFT, the newest double edged sword

[CodeBuster]

playing with mutual funds, 401ks, etc that have large numbers of people's saving in them.

Most mutual funds are either indexes or run by a management team with specific strategies, goals and investment styles; all of which are spelled out in the prospectus. Even the large public pension funds, which have dabbled in private equity and derivatives in an attempt to juice returns without much success, have still been used human experts; not algorithms which both decide what is to be traded and make trades autonomously. From what I've heard, the algorithmic trading platforms are mostly the preserve of specialized hedge funds and their wealthy clients, not average investors attempting to save for their retirement.

A note about liquidity

[jgotts]

There is debate about whether HFT provides more liquidity. I am of the opinion that it does. HFT is used to make quotes, an order pair with a bid and an ask price [and quantities]. When there is a market in something, you can buy it or sell it. Without a market the thing you want to buy or sell is illiquid, and a trade cannot take place. Correctly-written HFT algorithms can enter orders of magnitudes more quotes than a manual or semi-manual process and importantly adjust those quotes when they become out of line, replacing them with new quotes. HFT also reduces the gap between bid and ask prices because an asking price that's too cheap or a selling price that's too low is more quickly eliminated (executed as a trade).

HFT then gives you a great idea of the price of something and the ability to execute a trade at that price or close to it. It's like going to the grocery store and being able to buy a dozen apples for between $2.00 and $2.01. In the past, roughly speaking, you might not be able to buy those apples at all or the price range would have been between $1.90 and $2.10. Maybe a better analogy would be that tangelo would not have been available to you in the past for a reasonable price because nobody wants to sell it at that reasonable price for fear of losing money.

A great example of computers providing liquidity is craigslist. Want to get rid of that couch? For a nill transaction cost you can enter a sell order of $50.00 + pick up with a quantity of one and in this liquid market you will have a high probability of a successful execution. The Internet has made your old couch into a now more liquid asset. HFT is like that, except with orders of magnitude higher speeds.

faster != smarter

[TiggertheMad]

your analysis is only correct if the HFT is smarter than the people buying and selling. if it is 'dumber' because the people it is buying and selling from then is is just losing money. There is no evidence I have seen that HFT algorithims are actually any smarter, just more aware of micro fluctuations that may or may not be relevant.

Timescales

[TiggertheMad]

If the HFT really gets access to trades being made by others before they are posted, then the SEC can bust them for insider trading.

I think that HFT are just looking for patterns in trading and making short term bets against identified trends, which is just fine. You do the same thing if you buy a stock and hold it for a year when compared to someone who holds a stock for 30 years.

A stupid question

[mapkinase]

A stupid question: shouldn't there be a sales tax for stock transfers?

What could go wrong?

[gestalt_n_pepper]

Certainly no chance of emergent behavior causing unpredictable behavior. Wait, did another flash crash just happen?

Nanex Historical Data & whitepapers

[zero0ne]

Check out some of the whitepapers Nanex releases on what they see from all the market data.

Nanex Analysis

Virtually nobody knows what HFT actually is

[m.dillon]

Here's a quick primer:

* HFT is basically situating your own servers in the same machine room as the exchange computers. Then they are given ammunition in the form of 'flash orders'... orders which either fill instantly or are aborted. The HFT computers basically post these flash orders as quickly as they can. When the SEC tested raising the transaction limit for HFT traders to 1 milllion transactions a second the HFT computer's order volume instantly filled the gap and ran at 1 million transactions a second.

* Most of these transactions don't actually do anything. They are 'discovery' transactions or they are simply designed to cause other computer trading algorithms to go haywire by delaying the consolidated tape.

* HFT does not add liquidity to the market. Think about that a moment... if cycling a few millions dollars continuously around in a circle added liquidity to the market then anyone could do it and the market would magically be infinity liquid. There is no argument here. Only people who don't understand how the market works thinks HFT might be able to add liquidity to it. It absolutely does not. This was obvious in several flash crashes where algorithmic trading systems tried to trade into what they thought was liquidity and the HFT algorithms withdrew that liquidity in an instant. Boom, gone. Liquidity you can withdraw in 1 microsecond is not liquidity.

* The primary mechanism for HFT to make money is to create delays in the consolidated tape in order to create wider differences between exchanges for the same ticker symbol, then use those differences to arbitrage a small profit using colocated servers at each location. In this manner HFT might actually aid in price-discovery to some degree, if not for the fact that the price 'discovery' you see on your screen is going to be a few seconds old due to the delay in the consolidated tape. So... no.

* HFT can cause normal algorithmic trading to blow up spectacularly. Normal algorithmic trading depends on prices being accurate (think about that... most computer programs go haywire if presented with inaccurate input). HFT causes prices to be inaccurate, sometimes by a lot, allowing HFT algorithms to blow up algorithmic trading algorithms. I would say they do this on purpose... but the more confusion they can cause the more profit they make.

* HFT primarily hurts institutional traders because HFT algorithms can use flash orders to probe the limits of the institutional trader's orders and then front-run them.

* HFT *IS* front-running. That's what a flash order basically allows them to do. They can come in $0.001 in front of normal traders (who can only quote prices in cents.. $0.01) and take the market making away from the legitimate seller. Many exchanges have incentives for adding liquidity. HFT can take that market making away from the legitimate buyer or seller and get the incentive. P.S. this is one reason why institutional investors are screaming angry at the exchanges for allowing HFT. HFT is stealing their exchange incentives.

* HFT does not really hurt individual investors like you and me, unless we're stupid or we try to day-trade against them or we're stupid and use market orders. Our orders are just too small and as human beings we can often see when algorithmic breakdowns create massive buying or selling opportunities and take advantage of that. I've traded these opportunities pretty much since the crash and never lost. They don't happen very often but they're fun to trade when they do. Mostly, though, for those of us who work investments in longer time spans (months or years instead of minutes or hours or days), the algorithmic and HFT trading shenanigans only create more obvious opportunities.

Institutional traders can't really take advantage of these opportunities unless the breakdown is of truly massive proportions. It's happened in a few cases but, oddly enough, the 'flash crash' the media talks about isn't one of them. It simply didn't last long enough. Action on Bo

Re:No

[kbensema]

Centrally planned economies are NP-hard. That's the first argument against them. The second is probably the USSR. As you decentralize planning, you break the problem down into smaller and smaller problems, but lose the guarantee of global optimality (except under certain unrealistic conditions - Pareto efficiency, but then you might as well roll free-market anyway).

The justification for private ownership of capital is property rights. Whether you derive those rights from self-ownership or religion is irrelevant. What is lacking is justification for the theft of that private property, which you fail to supply.

Additionally, at the end of the day, social priorities - even if computationally ranked - are defined by the axiomatic system from which we derive our morality. The idea of computing axioms is kind of circular. What mathematical formula would you like to optimize to choose between libertarianism and communitarianism? What isGood() function do you propose?

thats an argument for markets, not for HFT

[decora]

you can get everything you just stated from a human based 'open outcry' (people yelling) market. you get liquidity and you get 'price discovery' and you get efficiency (the price gap closing).

Leah McGrath Goodman, who wrote a book about Nymex, just posted on her blog a while back that oil traders have been emailing her telling her that 'price discovery' has broken down on the modern electronic oil market. In her book, she quotes a lot of traders saying that they believe that the anonymous nature of electronic markets allows gigantic investors like hedge funds and big banks to manipulate prices.

Nymex went electronic in 2006 - since then we've had the two biggest oil spikes in history. correlation is not causation, but its the first step to proving it.

HFT anomaly swaps

[decora]

congrats, you just invented the latest shitty financial insurance product for JP Morgan to cram into bundles and sell as a "solid investment" to widows and orphans.

and the commodities market?

[decora]

i dont eat IBM stock for dinner, but I eat corn and soybeans.

funny you should mention that

[decora]

Leah McGrath Goodman just wrote a book about the history of Nymex, which is a commodities exchange as opposed to a stock exchange. She says that oil traders have been emailing her telling her that price discovery has recently broken down in the oil market (which went electronic circa 2006).

centrally planned economies are good for IBM

[decora]

though. Soviet Russia was one of it's biggest customers, with Nazi Germany and FDR's New Deal America (think social security on punch cards) being other major consumers.

so how about a model?

[decora]

surely, surely there is a way to model markets, where you can decide how many members are speculating vs how many are there for some non-speculative purpose?

what about game theory? what about video games with in-game markets?

what about commodities markets?

[decora]

honestly, most people's daily lives are impacted far more by the commodities markets and the debt markets (the latter of which dont even occur on exchanges) than the stock market.

Re:what about commodities markets?

[LordNacho]

Well, it's hard to do anything other than speculate when you don't have the research. My guess is that commodity markets, on a mechanical level, work in much the same way as stocks: there's a computer that takes in all the orders and sends our the orderbooks and fills. So a number of firms involved in stocks will have chosen to also do commodities, yielding a similar result.

The Socialist Calculation "problem"

[damburger]

It always amuses me how libertarians who wish to criticise socialism (which to them means any economic system other than the outright market-driven insanity they favour) invoke the 'socialist calculation problem' to insist no economic solution, besides the one they intuited when they were 15 years old and reading Ayn Rand, can ever work.

The idea is that there is something magical in markets, something in the interaction between rational maximisers, that can't be reproduced analytically. Except that is exactly how modern capitalism functions. The notion that prices are determined by canny entrepreneurs belongs in the 19th century not the 21st.

What I always wondered...

[wisnoskij]

Is when someone/a computer buys some stocks and then sells them for a profit 1 second/minute/hour/day/month latter, where does the money come from?
I mean someone has to lose it right? So who just lost it all the money you just made in potentially a fraction of a second (before anyone could even get the money you just spent on the stock).

undesired interactions and outcomes

[Palpatine_li]

And humans are less likely to have that, right? Because we have never had economic cycles, bubbles; and all government regulations went exactly like how they were supposed to be. But seriously, if we speed up everything, we will have much smaller bubbles and cycles.

Re:No

[martin-boundary]

What he's proposing is that algorithmic trading should not be accepted as a substitute for human decision making.

How algorithms shape our world

[trastomatic]

Nice presentation from Kevin Slavin @ TED: http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_our_world.html

Re:Stock markets are just legalized gambling nowad

[julesh]

The stock markets are no longer about investing in companies you believe in or who have a solid track record.

I believed they ceased to be that circa 1720 with the South Sea Bubble. This was less than 40 years after the first stock market in the world was founded.

Re:Apparently they are unaware of the 1000 point d

[julesh]

The available academic studies on that crash suggest that while HFT was involved, the primary cause was decisions made by large hedge funds, which caused both HFT systems and human market makers to panic and get out of the market. It would have happened whether HFT was in use or not.

Who would have thought...

[Opportunist]

That "shut up or I'll replace you with a very small script" applies to investment bankers?

In World of Warcraft...

[elFisico]

... Automated trading would be called botting and would be verboten.

You must not forget, trading is a zero-sum-game, so whatever someone wins, somewbody else has to lose...

The BIS report

[c_petras]

Here is the paper : The Future of Computer Trading in Financial Markets Working paper Foresight, Government Office for Science This working paper has been commissioned as part of the UK Government’s Foresight Project on The Future of Computer Trading in Financial Markets. www.bis.gov.uk/assets/bispartners/foresight/docs/computer-trading/11-1276-the-future-of-computer-trading-in-financial-markets